Banks--- Betting on the recovery Message Board

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Non-Tech : Banks--- Betting on the recovery

WFC 88.38

-0.7%

Jan 16 9:30 AM EST

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To: RockyBalboa who wrote (31)	2/23/2009 12:00:09 AM
From: tejek	Read Replies (1) of 1428

Thanks, Rocky, for the definition.....I am assuming that the definition of puts is the opposite of what you said for calls. Is that correct? 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. Assuming the strike price is $10, what is the likely price of the stock when you bought the call? 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). How do you know what the call price is on a given stock? I assume that the greater the likelihood that the stock will run to $25 the more expensive the call. Is that correct? This seems considerably more difficult and risky than simply buying a stock. Am I right? ------- 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. Are you talking here about the person selling, not buying, the calls?

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