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Long
Calls
Function:
Speculation
Outlook:
Bullish
When
you buy calls, you are said to be long calls. Buying
calls gives investors the opportunity to leverage their investment
and make more money with what they have. However, buying calls
is relatively risky.
Example:
Jake has $10,000 and he wants to buy into ICOS Corp. ICOS
trades at $40, so Jake could buy 250 shares (assume no commissions),
costing Jake his full $10,000. However, Jake could buy 1-month
calls on ICOS with a strike price of $40, and a cost of $1.75 per
share, or $437.50. Here's the possible outcome
|
1-Month
Stock Price |
Profit
if He
Bought Stock |
Profit
if He
Bought Calls |
|
$38.00 |
-$500.00
/ -5.0% |
-$437.50
/ -100% |
|
$39.00 |
-$250.00
/ -2.5% |
-$437.50
/ -100% |
|
$40.00 |
$0.00
/ 0.0% |
-$437.50
/ -100% |
|
$41.00 |
$250.00
/ 2.50% |
-$187.50
/ -42.9% |
|
$42.00 |
$500.00
/ 5.0% |
$62.50
/ 14.2% |
|
$43.00 |
$750.00
/ 7.5% |
$312.50
/ 71.4% |
|
$44.00 |
$1,000.00
/ 10.0% |
$562.50
/ 128.6% |
As the chart shows, buying calls
means you lose 100% of your investment if the stock closes below the
strike price, but it means you will multiple your returns if the
stock goes up.
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