24 lines
1.6 KiB
Plaintext
24 lines
1.6 KiB
Plaintext
Call Buying
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The success of a call buying strategy depends primarily on one's ability to select
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stocks that will go up and to time the selection reasonably well. Thus, call buying is
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not a strategy in the same sense of the word as most of the other strategies discussed
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in this text. Most other strategies are designed to remove some of the exactness of
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stock picking, allowing one to be neutral or at least to have some room for error and
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still make a profit. Techniques of call buying are important, though, because it is nec
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essary to understand the long side of calls in order to understand more complex
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strategies correctly.
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Call buying is the simplest form of option investment, and therefore is the most
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frequently used option "strategy" by the public investor. The following section out
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lines the basic facts that one needs to know to implement an intelligent call buying
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program.
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WHY BUY?
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The main attraction in buying calls is that they provide the speculator with a great
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deal of leverage. One could potentially realize large percentage profits from only a
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modest rise in price by the underlying stock. Moreover, even though they may be
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large percentagewise, the risks cannot exceed a fixed dollar amount - the price orig
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inally paid for the call. Calls must be paid for in full; they have no margin value and
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do not constitute equity for margin purposes. Note: The preceding statements
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regarding payment for an option in full do not necessarily apply to LEAPS options,
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which were declared marginable in 1999. The following simple example illustrates
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how a call purchase might work.
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