Call Option Trading
An investor who feels the market will rise on a stock, index, sector or other, may wish to purchase call contract options.
If SRX Stock is expected to rise (from the investor's point of view), he could purchase a call option will rise in value during it's life if the stock does in fact rise. The value will depend on how high the market rises, and the time left on the contract. All Options have monthly expirations, so time is absolutely part of the strategy, and the risk.
Current market value of SRX is $63. The investor anticipated a jump in price over the next 14 days, but he does not want to spend additional funds to own the shares outright. A cheaper alternative (capital wise) would be to buy call contracts.
A position scenario could be as the following:
SRX Current Market Value or CMV is $63
Buys 1 SRX SEP 65 Call for a $400 premium per contract.
If SRX begins to increase, the value of the contract will go up. The contract itself allows the buyer to lock in a price of 65 per share until September. If SRX moves to say $72, the investor can still buy the stock for $65. The contract itself can also be traded. So, if the market doe move to $72, the contract could be worth $1000. The investor could sell the contract and make a profit of $600 from his original investment of $400.
The risk is the stock remains flat or goes down and the contract expires worthless. The maximum loss would be the $400 invested. The maximum gain is unlimited or unknown for the upside since the owner can lock in a buy price of $63 and the stock could shoot up to anything. The break even is 69. Call (or strike price) of 65 + 4 ($400 premium)
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