SI
SI
discoversearch

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor.  We ask that you disable ad blocking while on Silicon Investor in the best interests of our community.  If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.
Non-Tech : Banks--- Betting on the recovery
WFC 88.37-0.7%Jan 16 3:59 PM EST
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  
To: tejek who wrote (25)2/22/2009 6:30:42 PM
From: RockyBalboa2 Recommendations  Read Replies (2) of 1428
 
A call gives you the right to buy a stock at one predetermined level (strike price, like $10 until a certain time, like March) in that example. This right to buy has itself a value, which is if the stock trades below the $10, consisting only of "time" value or volatility value. At expiration in March, the right to buy the stock at $10 is worth 0 provided that the stock trades where it is today, or even lower.

In that example this right (the call option) was traded at $2.40. A buyer puts down $2.40 to have the right, but not the obligation to buy the stock at $10 until the expiry on March 20th. If the stock goes to zero he loses $2.40. if the stock runs to $25 he would gain $12.60 ($25 - $10 - 2.40).

-------

In that example the poster sold short the calls and receives the premium. He believes that $2.40 is expensive and on the other hand the company not dying until March 20. He has the obligation to deliver the stock and receive $10; something which would occur if the stock actually rises over $10.

In that case he would make a sure gain of $2.40 + $0.81 (as he paid $9.19 for the stock and it is called - delivered for $10). Thats the maximum gain for the strategy.

Otherwise the option expires worthless on March 20. In that case he keeps the $2.40 and can sell the stock at whatever he gets. The strategy would lose if the stock falls further and the $2.40 in premium earned do not cover the loss (here below 6.79).

This strategy is called "covered call"; a short position on call options covered by having the underlying stock.
Report TOU ViolationShare This Post
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  

HomeMailHotSubjectMarksPeopleMarksKeepersSettings
Terms Of UseContact UsCopyright/IP PolicyPrivacy PolicyAbout UsFAQAdvertise on SI
© 2026 Knight Sac Media.  Data provided by Twelve Data, Alpha Vantage, and CityFALCON News