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.

Bullish Leaps Call Spread
Example: XYZ is at 82.50, up 2 points today on news that a large Wall Street firm has just upped their target price for the stock to $100/share.
Outlook: You believe XYZ will reach target of $100/share by the end of 2001.
Possible strategy: LEAPS Bull Spread:
Buy 1 December 80 call @ 14.25
Sell 1 December 100 call @ 6;
Net cost of 8.25 or $825.00.

*All values shown are at the time of expiration.

Stock Change
XYZ @ expiration
Long 80 call value
Short 100 call value
Spread Value
Spread Cost
Net Profit/(Loss)
+27.27%
105
$2,500.00
$500.00
$2,000.00
($825.00)
$1,175.00
+21.21%
100*
$2,000.00
$0.00
$2,000.00
($825.00)
$1,175.00
+6.97%
88.25***
$825.00
$0.00
$825.00
($825.00)
$0.00
+/- 0.00%
82.50**
$250.00
$0.00
$250.00
($825.00)
($575.00)
-3.03%
80****
$0.00
$0.00
$0.00
($825.00)
($825.00)
-9.09%
75
$0.00
$0.00
$0.00
($825.00)
($825.00)

AT EXPIRATION (12/22/01)
* Max Gain: $1,175.00 if XYZ > or = 100 (+ 21.21%)
** Unchanged: Loss of $575.00.
*** Break-even: XYZ @ 88.25 (+6.97%)
**** Max Loss: $825.00 if XYZ < or = 80 (- 3.03%)


IN SHORT:
Purchase a LEAPS call spread for a cost of $825.00 (maximum risk) which could yield a max profit of $1,175.00 if XYZ reaches target of 100 (+21.21%) by December expiration.

CBOE Volatility Index (VIX)