Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

Buying Calls

Example:         Stock is trading at $50 

Outlook:                  You are bullish on the stock and would like to buy 100 shares with limited downside risk.

Possible strategy:    Buy one sixty-day 50 strike call at $3.00

*All values shown are at the time of expiration. Commissions and other trading fees not included.

Stock

Long 60 Call

Long 60 Call
Initial Cost

Net Profit (Loss)

40

0

(3.00)

(3.00)

45

0

(3.00)

(3.00)

50

0

(3.00)

(3.00)

55

5

(3.00)

 2.00

60

10

(3.00)

 7.00

 

 

At Expiration:

  • Maximum Gain = Theoretically Unlimited
  • Breakeven = Strike Price + Premium Paid
  • Breakeven = $53
  • Maximum Loss = Total Premium Paid
  • Maximum Loss = $300    

In Summary: Consider purchasing a call option if you anticipate a rally in the stock.  You should have a timeframe in mind to realize your forecast. Risk is limited to the total premium paid for the option. You have the right but not the obligation to purchase shares of the stock.  Profit potential is theoretically unlimited.