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 a Call
Example: XYZ stock is trading $50.
Outlook: You are bullish on XYZ stock and would like to buy 100 shares.
Possible strategy: Buy one 60 day XYZ 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:
- Breakeven = Strike Price + Premium Paid
- Breakeven = 53
- Maximum Loss = Total Premium Paid
- Maximum Loss = $300
In Summary: Purchase an XYZ call if you anticipate a rally in the stock. Have a timeframe in mind to realize your forecast. Risk is limited to the total premium paid. Profit potential is theoretically unlimited.
Options involve risk and are not suitable for all
investors. Prior to buying or selling an option, a person must receive a copy
of Characteristics and Risks of Standardized
Options (ODD). Copies of the ODD are available from your broker, by
calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North
Wacker Drive, Suite 500, Chicago, Illinois 60606. The information on this
website is provided solely for general education and information purposes and
therefore should not be considered complete, precise, or current. Many of the
matters discussed are subject to detailed rules, regulations, and statutory
provisions which should be referred to for additional detail and are subject to
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