96 Part II: Call Option Strategies 
Example: Assume that XYZ is at 48 and the 6-month call, the July 50, is selling for 
3. Thus, with an investment of $300, the call buyer may participate, for 6 months, in 
a move upward in the price ofXYZ common. IfXYZ should rise in price by 10 points 
(just over 20%), the July 50 call will be worth at least $800 and the call buyer would 
have a 167% profit on a move in the stock of just over 20%. This is the leverage that 
attracts speculators to call buying. At expiration, if XYZ is below 50, the buyer's loss 
is total, but is limited to his initial $300 investment, even if XYZ declines in price sub­
stantially. Although this risk is equal to 100% of his initial investment, it is still small 
dollarwise. One should nornwlly not invest more than 15% of his risk capital in call 
buying, because of the relatively large percentage risks involved. 
Some investors participate in call buying on a limited basis to add some upside 
potential to their portfolios while keeping the risk to a fixed amount. For example, if 
an investor normally only purchased low-volatility, conservative stocks because he 
wanted to limit his downside risk, he might consider putting a small percentage of his 
cash into calls on more volatile stocks. In this manner, he could "trade" higher-risk 
stocks than he might normally do. If these volatile stocks increase in price, the 
investor will profit handsomely. However, if they decline substantially - as well they 
might, being volatile - the investor has limited his dollar risk by owning the calls 
rather than the stock. 
Another reason some investors buy calls is to be able to buy stock at a reason­
able price without missing a market. 
Example: With XYZ at 75, this investor might buy a call on XYZ at 80. He would like 
to own XYZ at 80 if it can prove itself capable of rallying and be in-the-money at expi­
ration. He would exercise the call in that case. On the other hand, if XYZ declines in 
price instead, he has not tied up money in the stock and can lose only an amount 
equal to the call premium that he paid, an amount that is generally much less than 
the price of the stock itself. 
Another approach to call buying is sometimes utilized, also by an investor who 
does not want to "miss the market." Suppose an investor knows that, in the near 
future, he will have an amount of money large enough to purchase a particular stock; 
perhaps he is closing the sale of his house or a certificate of deposit is maturing. 
However, he would like to buy the stock now, for he feels a rally is imminent. He 
might buy calls at the present time if he had a small amount of cash available. The 
call purchases would require an investment much smaller than the stock purchase. 
Then, when he receives the cash that he knew was forthcoming, he could exercise the 
calls and buy the stock. In this way, he might have participated in a rally by the stock 
before he actually had the money available to pay for the stock in full.