- An investor who is very bullish on the Standard & Poor’s 500 index (SPX) and wants to profit from a rise in its level
- An investor who wants diversify a portfolio with upside exposure of the S&P 500, but may not be willing (or able) to commit the cash to an investment in a portfolio of multiple component stocks (or downside risk)
- An investor who would like to take advantage of the leverage that options can provide, and with a limited dollar risk
Buying an SPX call is one of the simplest and most popular strategies used by option investors employing SPX index options. It allows an investor the opportunity to profit from an upward move in the level of the SPX, while having much less capital at risk than with the outright purchase of scores of SPX component issues.
Buying an SPX index call gives the owner the right, but not the obligation, to buy the value of the underlying index at the stated exercise (strike) price upon exercise. If the contract is exercised, the call owner will receive its cash settlement amount: the difference between the call’s strike price and the SPX exercise settlement value, times the $100 contract multiplier. Although European-style SPX index options may generally be exercised only on the last business day before expiration, the day on which the SPX exercise settlement value is reported, any long SPX option (call or put) may be sold in the marketplace on or before its last trading day if it has market value.
This is a bullish strategy because the value of the call tends to increase as the level of the SPX index rises, and this gain in option value will increasingly reflect a rise in the value of the SPX when its level moves above the call option’s strike price.
The profit potential for the long SPX call is unlimited as the SPX index continues to rise. The financial risk is limited to the total premium paid for the option, no matter how low the SPX declines. The break-even point is an SPX index level equal to the call’s strike price plus the premium paid for the contract. As with any long option, an increase in volatility has a positive financial effect on the long SPX call strategy while decreasing volatility has a negative effect. Time decay has a negative effect.