Call Strategies

An advisory service would usually recommend buying a call on a particular stock when they expect the price of that stock to go up. When you purchase a call option, you have the right (but not the obligation) to buy 100 shares of the underlying stock at a specified price (the strike price) at any time before a specified date (the expiration date).

:: Trading Condition

Stock	IBM
Price	$88.00
Outlook	Near term bullish

:: Alert Example

Action	Buy 10 Calls
Strike	$90.00 (OTM)
Premium	$2.00

:: Profit Scenario

As the stock price increases, it first reaches your break even point. This is $92 (the strike price of $90 plus the $2.00 premium). Once the stock has passed this point you are in profit and the expectation would be for the price of IBM to go above $92 before the expiry date of the options. When the stock reaches $97 the options are sold. At this point, they would be trading for around $7.00 (current stock price of $97 less strike price of $90). Your profit would have been $5,000:	Cost Per Contract
		$2.00 x 100* = $200
	Total Trade Cost
		$200 x 10 = $2000
	Profit Per Contract
		($7.00 - $2.00) x 100 = $500
	Total Trade Profit
		$500 x 10 = $5,000

:: Loss Scenario

On the other hand, if the advisor were wrong and the price of the stock fell to $83, the price of your call options would also decrease. As the expiration date approaches time decay will also erode their value. The point to remember, however, is that you can never lose more than you invested, which is the premium you paid for the option.

*In all these calculations, the premium for one option contract is always multiplied by 100, as it represents 100 shares of the underlying.