Buy Calls

Strategy View

If you think the market will rise significantly in the short term, buy calls.

Purchase a call at strike a. The more the market rises above strike price a, the greater the profit. If, in fact, the market does rise, exercise the call to take advantage of the a long position in the underlying instrument. If the market drops, let the option expire to mitigate your losses -- the cost of the option.

Strategy Implementation
Call options are bought with a strike price of a, typically at the current market price. Calls with strikes above the current market value are out of the money and are less expensive.

Upside Potential
Profit potential is unlimited and rises as the market rises.

Break-Even Point at Expire
Strike price plus premium.

Downside Risk
Limited to the premium paid - incurred if the market at expire is at, or below, strike a.

Margin
Not required.

Comment
In a neutral market, the value of a call that is at- or near-the-money will decrease as expiration approaches.