E. Option Trading Strategies
1. Buying Call Options
- a. Buying to achieve leverage
- The price of a call of 100 shares is significantly lower than buying the shares outright.
- Example: IBM sells at $50/share and a $50 call costs $5/share. The Investor can buy the call for $500 instead of the shares for $5,000. If IBM goes to $60, the value of the option is $1000.
- Return on option: $1000/$500 = 200%
- Return on stock purchase: $1000/$5000 = 20%