Let's suppose you own a stock that was trading at $23.80 per share and someone offered you $2.60 a share to buy it at $25.00 within the next month. Would you take the offer?

Off the top of my head, it sounds like a pretty good deal to me. But there are several things I would have to consider before accepting it. First, I'd have to decide whether the stock's price would be more likely to go up or down during the offer period. If I thought it would go above $27.60 per share and stay there, I'd reject the offer and keep the stock. If I thought it was likely to go down and stay below $21.20 for a long time, I'd reject the offer and sell the stock. If, however, I thought that the stock's price would stay between $21.20 and $27.60, I'd take the offer. It would be a nice way to generate some cash while the stock's price didn't do very much. So how would I go about making these assessments?

First, I would look at VectorVest's Market Timing Graph to see what the market was doing. Right now it appears that the rally is stalling, so I would conclude that the chances of my stock soaring higher have lessened a bit. Next, I would check the stock's Relative Timing, RT, indicator. If RT were above 1.00, the stock's price would be in an uptrend. If RT were below 1.00, the stock's price would be in a downtrend. This information would definitely affect my analysis.

Then I would use VectorVest's Option Pricing Model to see if the offer of $2.60 per share were fair. I could also see whether it would even be worth considering the offer. Finally, I could get an idea of the probability of my stock closing above $25.00 a share a month from now. If I wanted to see the probability of this stock's price staying between $21.20 and $27.60 per share, I would use VectorVest's Options Analyzer.

To be honest, nobody has actually offered to pay me $2.60 a share to buy my $23.80 stock at $25.00 within the next month. But I know I can cause this to happen by selling September 25th Calls against it @ $2.60 per share. I would then have a "Covered Call" position and it would yield a juicy 157.71% annualized rate of return if the stock closed at or above $25.00 per share at expiration.

If you're interested in finding trades such as this, you would definitely want to use VectorVest's Options Rate of Return tool. It's a marvelous tool and, unfortunately, we don't talk about it often enough. Frankly, we don't talk often enough about any of the VectorVest Option Tools.