Strategies

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Buying Calls

 

ZYX is above break-even point of $48.25 at expiration


chart1

If ZYX closes above the break-even point of $48.25 at expiration, at $51 per share for instance, the option will be in-the-money and worth its intrinsic value (difference between the strike price and stock price):

 $51.00   ZYX stock price
-$45.00  call strike price
   $6.00   intrinsic value

If you sell the ZYX 45 call for its intrinsic value of $6 then you would see a profit:

$6.00  intrinsic value received at call's sale
$3.25  premium initially paid for call
$2.75  profit

This profit of $2.75 ($275 total) represents a return on an initial investment of $3.25 premium paid for the call ($325 total) of approximately 84.6% over the 6-month life of the call contract.

The call could also be exercised, and 100 shares of ZYX purchased at the contract's strike price of $45 per share plus the $3.25 call premium paid, or a net price of $48.25. The stock could either be sold in the marketplace or held in anticipation of continued profits on the upside.


chart 2

Instead of purchasing the call, had the stock been purchased outright at $44.25 per share and increased in price to $51 at option expiration, it would then be worth a total of $5,100. The result is a 15.25% return over the initial stock investment of $4,425 versus an 84.6% return for the option investor.

 
 

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