22 lines
1.2 KiB
Plaintext
22 lines
1.2 KiB
Plaintext
Gaining Exposure • 189
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Long Call
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GREEN
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Downside: Fairly priced
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Upside: Undervalued
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Execute: Buy a call option
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Risk: Amount equal to premium paid
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Reward: Unlimited less amount of premium paid
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The Gist
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An investor uses this strategy when he or she believes that there is a material
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chance that the value of a company is much higher than the present market price.
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The investor must pay a premium to initiate the position, and the proportion of
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the premium that represents time value should be recognized as a realized loss
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because it cannot be recovered. If the stock fails to move into the area of exposure
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before option expiration, there will be no profit to offset this realized loss.
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In economic terms, this transaction allows an investor to go long an
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undervalued company without accepting an uncertain risk of loss if the
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stock falls. Instead of the uncertain risk of loss, one must pay the fixed pre-
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mium. This strategy obeys the same rules of leverage as discussed earlier
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in this book, with in-the-money (ITM) call options offering less leverage
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but being much more forgiving regarding timing than are at-the-money
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(ATM) or especially out-of-the-money (OTM) options. |