Close Below Strike

Index XYZ is at or below 505 at expiration



Buy 1 XYZ 505 Call at $11


Say index XYZ did not move as anticipated, but instead declined and closed at 500 at expiration. The XYZ 505 call would expire out-of-the-money and with no value, so the investor would lose the total premium of $1,100 initially paid for the option. This would be the limited, maximum loss no matter how far XYZ had declined, and would also be realized if at expiration XYZ closed at any point at or below the $505 strike price and the call expired with no value.

By purchasing the call for $1,100, significantly less cash than the $50,000 underlying asset value when the position was established, the investor limited the investment capital at risk if index XYZ did not increase as anticipated. Now he still has the $48,900 cash balance of his original investment capital, plus interest if it had been invested in short-term interest bearing instruments, with which to make another investment decision.

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