Summary - Buying Index Calls

For those who are very bullish on a particular index over the near- or long-term, and who require a known, limited downside risk, buying an index call might be an appropriate strategy to use. Purchasing an index call option usually requires a smaller initial cash investment than an investment equal to the current underlying asset value (current index level x 100 multiplier). In addition to reducing the capital at risk, the smaller call purchase amount offers the potential of leveraged profits if a bullish outlook proves correct. As the underlying index continues to increase, the long call’s profit potential is theoretically unlimited. On the downside, the call buyer’s maximum loss is known in advance and is limited entirely to the option’s purchase price.

Today's investor has a choice of shorter-term expiration months afforded by regular index option contracts, longer-term expirations available with LEAPS®, as well as multiple strike prices. So no matter an investor’s anticipated target price for an underlying index after a bullish move, or the time frame over which this move might occur, there is most likely a call contract that fits both his outlook and tolerance for risk.

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