Long ATM Call
Kim is a trader who is bullish on the Walt Disney Company (DIS) over the
short term. The time horizon of her forecast is three weeks. Instead of
buying 100 shares of Disney at $35.10 per share, Kim decides to buy one
Disney March 35 call at $1.10. In this example, March options have 44
days until expiration. How can Kim profit from this position? How can she
lose?
Exhibit 4.1 shows the profit and loss (P&(L)) for the call at different time
periods. The top line is when the trade is executed; the middle, dotted line is
after three weeks have passed; and the bottom, darker line is at expiration.
Kim wants Disney to rise in price, which is evident by looking at the graph
for any of the three time horizons. She would anticipate a loss if the stock
price declines. These expectations are related to the position’s delta, but that
is not the only risk exposure Kim has. As indicated by the three different
lines in Exhibit 4.1 , the call loses value over time. This is called theta risk .
She has other risk exposure as well. Exhibit 4.2 lists the greeks for the DIS
March 35 call.
EXHIBIT 4.1 P&(L) of Disney 35 call.
EXHIBIT 4.2 Greeks for 35 Disney call.