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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1203  
Subject: Re: Option ROI question Date: 5/13/2013 2:18 PM
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Tavern1971,

You wrote, I feel all the underlying stocks have room to run yet (8 more months until expiration minimum), BUT I do not want to be greedy and lose these great returns. I know that time decay accelerates with about 6 months until expiration and again at 90 days until expiration.

What is a reasonable ROI when purchasing call options??


Bearing in mind that I'm far from an expert in options, I'd say that you're asking the wrong question. I think you should be asking yourself, Is there more upside than downside left? And what are the odds of each?

Ideally whenever you buy any investment you should have some exit strategy in mind. Of course plans can change over time (usually given news about the investment); but ideally you should set a target price at purchase and stick with it unless you see a very good reason to change plans. (Note: Even a buy and hold stock strategy should do this ... though a B&H tends to pick more mature value or growth issues that in theory don't require as much monitoring and for which the management has figured out how to turn a consistent profit in its chosen industry. This should result in less churn in a properly managed portfolio.)

Just because you think there is room to run or you don't want to be greedy is not a good reason (by itself) to hold or sell. Instead you should always set a price-point where you've realized as much value as you can currently expect given what you know without exposing yourself to too much downside risk. This is always the case, even when news is bad and you're looking at taking a loss.

And remember: It's extremely rare (lucky or unlucky) for your entry and exit to be on both the bottom and the top of a chart. If you get lucky, good for you. But planning on getting lucky in all your trades is a great way to lose a lot of money.

As for your specific case? Well, you really haven't really given enough information for anyone to express a useful opinion.

- Joel
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