I just bought some more Visteon common. …

I just bought some more Visteon common.  I thought the call options on this one, which has been trading in a $20 range between $60 and $75 for the last year, would be cheaper than they are right now.  This stock’s kind of range performance for such a sustained period of time  would normally translate into the call options having some cheap-o premiums.  But in this Visteon case right now, let’s break it down for you why I think the calls are too expensive.

If I were to buy the December 2011 call options for Visteon, here are the prices I’d have to pay right now:

• Dec 11 VC calls with a $55 strike go for $11.90
• Dec 11 VC calls with a $65 strike go for $6.50
• Dec 11 VC calls with a  $70 strike go for $5

Visteon sells for $62 a share right now, meaning you can buy 100 shares for $6200.   Alternatively, looking at the prices I give you for the December 2011 call options with various strike prices, you can see that you get more leverage for less money.  Specifically, in the Visteon example above, those prices I list mean that if you were to buy the right to sell someone 100 shares of Visteon stock on the third Friday of December at $55 per share (which are currently “in-the-money” because the stock is above that price), it would cost you $1190.  The right to sell it at the higher price of $70 would cost you only $500 because $70 is “out-of-the-money” while the stock is below that price (and the current quote of the stock at $62 per share is obviously below $70, right?).   Of course, as I often remind you dear subscribers, when we buy options, we can lose 100% of the capital risked if the stock isn’t on the right side of the strike before the expiration date.

Meanwhile, given that Cypress is currently at just under $22 per share, fully double where it was this time last year when I first started highlighting it as “the next Apple” for readers, you would think that the options in that name would be more expensive given such a big move higher.  Here are the current quotes for the same expiration date as Visteon’s call options above, the December 2011 near-the-money call options, for Cypress:

• Dec 11 Cypress calls with a $20 strike for $3.50
• Dec 11 Cypress calls with a $22 strike go for $2.45
• Dec 11 Cypress calls with a $24 strike go for $1.70

With Cypress currently at about $22 a share that means you can buy 100 shares for Cypress for $2200.  And yes, looking at the prices I give you for the December 2011 call options with various strike prices, you can see that you get more leverage for less money.  Specifically, in this Cypress example, those prices I list mean that if you were to buy the right to sell someone 100 shares of Cypress stock on the third Friday of December at $20 per share, it would cost you $350.  The right to sell it at the higher price of $24 would cost you only $170 because $24 is “out-of-the-money” while the stock is below that price (and the current quote of the stock at $22 per share is obviously below $24, right?).

So which options, if either give you the better bang for you buck?

With the in-the-money call options I outline there above, you can buy the right to control 100 shares of Visteon stock at 10% below the current quote (the $55 strikes) for $1190 or about 19% of what it would cost you to just buy 100 shares of the common stock, which would cost you $6200.   Meanwhile, you can buy the right to control 100 shares of Cypress stock at 10% below the current quote (the $20 strikes) for $350 or about 16% of what it would cost you to buy 100 shares of Cypress common stock, which would cost you $2200.

With the out-of-the-money call options I also outline above, you can buy the right to control 100 shares of Visteon stock at 10% above the current quote (the $70 strikes) for $500 or about more than 8% of what it would cost you to just buy 100 shares of the common stock, which would cost you $6200.   Meanwhile, you can buy the right to control 100 shares of Cypress stock at 10% above the current quote (the $24 strikes) for $170 or closer to 7% of what it would cost you to buy 100 shares of Cypress common stock, which would cost you $2200.

In other words, it costs more premium to buy the rights to sell people Visteon stock at both in-the-money and out-of-the-money strike prices than it does for to buy the rights to sell people Cypress stock with the same variables.  Yet, Cypress is a much more volatile stock and has been performing tremendously on both the fundamentals and on the stock price in the last few quarters.

Now as our analysis points to a Visteon that could double in the next twelve months like Cypress did for us in the last twelve months, I bought Visteon common stock even though I would have expected I’d be able to buy some long-dated calls in this name on the cheap.   Take the pitches that the markets give ya’.