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5. Long Call
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Scenario:
A trader projects that stock market futures are poised for a large upward move in a short period of time. An increase in the underlying futures to 1315.00 or greater, and an increase in implied volatility by 4 percentage points, also seem likely. Consequently, the trader decides to buy a call.
Specifics:
| Underlying Futures Contract: | December S&P 500 | |
| Futures Price Level: | 900 | |
| Days to Futures Expiration: | 45 | |
| Days to Options Expiration: | 45 | |
| Option Implied Volatility: | 18.1% | |
| Option Position: | Long 1 Dec 905 Call | - 5.40 ($1350) |
At Expiration:
| Breakeven: | 910.40 (905 strike + 5.40 premium) | |
| Loss Risk: | Below 910.40; with maximum loss, at 905 or below, of 5.40. | |
| Potential Gain: | Unlimited; profits continue to increase as futures rise above 910.40. | |
Things to Watch:
The trader will lose the volatility effect if this position is held to expiration. As soon as implied volatility rises to the expected level the trader may consider liquidating or transforming this position. Check the next page for appropriate follow-up strategies.
Follow-up Trading Strategies
MENU - Futures Strategy Guide
Contents Courtesy of CME.com
