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.
Long Leaps® Call
Example: Fizzy Drink (FZZ) is now trading at $45, down from the mid 50's 3 months ago and down from the mid 60s earlier this year. You don't consider FZZ to be a cyclical stock.
Outlook:Short-term uncertain, but very bullish longer-term.
Possible strategy:Buy FZZ LEAPS call:
Buy 1 January (2010) 40 call at 10.40
Net cost of 10.40 or $1,040.00
*All values shown are at the time of expiration .Commissions and other transaction fees not included.
FZZ Change
|
FZZ @ expiration
|
Long 40 call value
|
Call cost
|
Net Profit/(Loss)
|
+55.56%
|
70.00
|
$3,000.00
|
($1,040.00)
|
$1,960.00
|
+33.33%
|
60.00
|
$2,000.00
|
($1,040.00)
|
$960.00
|
+11.11%
|
50.00*
|
$1,000.00
|
($1,040.00)
|
($40.00)
|
+/-0.00%
|
45.00**
|
$500.00
|
($1,040.00)
|
($540.00)
|
-11.11%
|
40.00***
|
$0.00
|
($1,040.00)
|
($1,040.00)
|
-22.22%
|
35.00
|
$0.00
|
($1,040.00)
|
($1,040.00)
|
AT EXPIRATION: (1/15/10)
*Break even:FZZ at 50.40 (+12.00%)
**Unchanged:Loss of $540.00
*** Max. Loss:$1,040.00 if FZZ < or = 40.00 (-11.11%)
Note: Maximum gain is theoretically unlimited
IN SHORT: Purchase an in-the-money LEAPS call for a cost of $1,040.00 (maximum risk) if you expect FZZ to rally significantly over the next 14 months. Maximum profit is theoretically unlimited.