Strategies

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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.

OEX Bull Call Spread

Situation:
The Standard & Poor's 100 Index (OEX), a capitalization-weighted index of 100 stocks from a broad range of industries, is at a level of 680.30.

Outlook:
Bullish on the broad marketplace for the short term. Want to "go long" the market for less than a $1,000 cost.

Possible Strategy:
Bull Spread: Buy 1 OEX June 680 call @ 23-7/8 and Sell 1 OEX June 695 call @ 14-7/8. Net cost of $9 or $900.00.

*All values shown are at the time of expiration.

Index Change
OEX @ exp.
Long 680 call value
Short 695 call value
Spread Value
Option Spread Cost
Net P/(L)
2.89%
700
$2,000.00
$500.00
$1,500.00
($900.00)
$600.00
2.16%
695.00****
$1,500.00
$0.00
$1,500.00
($900.00)
$600.00
1.28%
689.00*
$900.00
$0.00
$900.00
($900.00)
$0.00
+/- 0.00%
680.30**
$30.00
$0.00
$30.00
($900.00)
($870.00)
-0.04%
680.00***
$0.00
$0.00
$0.00
($900.00)
($900.00)
-0.78%
675
$0.00
$0.00
$0.00
($900.00)
($900.00)

AT EXPIRATION (06/16/01)
* Break-even: OEX @ 689.00 (+ 1.28%)
** Unchanged: Loss of $870.00
*** Max. Loss: $900.00 if OEX < or = 680.00 (- 0.04%)
**** Max Gain: $600 if OEX > or = 695 (+ 2.16%)

In Short:
This is a $900 investment that has the possibility of returning a $600 profit if the OEX increases 2.16% by expiration. Unchanged yields loss of $870.00 and maximum risk is equal to the initial investment of $900.00.

Note:
Users are reminded that S&P 100 (OEX) index options are cash-settled, PM settlement and American style exercise, and, thus, carry the possibility of early assignment. There is a risk of loss due to market movement because of the timing between the day of assignment and any subsequent exercise the following day.


CBOE Volatility Index (VIX)