Shares of innovative online and mobile commerce company, eBay Inc (NASDAQ:EBAY), are looking for a bid. The stock suffered this month after another failed attempt to push above $58, which is within striking distance of its all-time high near $59 made in 2004.
In November 2012, eBay Inc (NASDAQ:EBAY) broke above the triple-top resistance at $50. This level now acts as critical support to lean on in the overall bullish uptrend.
In the eight months since the rally above the $50 level, eBay Inc (NASDAQ:EBAY) shares have traded sideways, topping at $58 in February, April and July. A test of the $58 high projects an $8 move (the height of the $50-$58 trading range) to $66.
The $66 target is about 27% higher than current prices, but traders who use a capital-preserving, stock substitution strategy could more than double their money on a move to that level.
One major advantage of using long call options rather than buying a stock outright is putting up much less capital to control 100 shares — that’s the power of leverage. But with all of the potential strike and expiration combinations, choosing an option can be a daunting task.
Simply put, you want to buy a high-probability option that has enough time to be right, so there are two rules traders should follow:
Rule One: Choose an option with a delta of 70 or above.
An option’s strike price is the level at which the options buyer has the right to purchase the underlying stock or ETF without any obligation to do so. (In reality, you rarely convert the option into shares, but rather simply sell back the option you bought to exit the trade for a gain or loss.)
It is important to buy options that pay off from a modest price move in the underlying stock or ETF rather than those that only make money on the infrequent price explosion. In-the-money options are more expensive, but they’re worth it, as your chances of success are mathematically superior to buying cheap, out-of-the-money options that rarely pay off.
The options Greek delta approximates the odds that an option will be in the money at expiration. It is a measurement of how well an option follows the movement in the underlying security. You can find an option’s delta using an options calculator, such as the one offered by the CBOE.