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The Power of the Call Option

March 11, 2022 by Frank Kaberna| Tips & Strategies

The wide world of options can open up an everyday trader’s portfolio to P/L fluctuations unseen in the outright world of shares and futures. You can take advantage of large moves higher while only putting up a small, set amount of capital by buying calls. You can make money from a particular market’s demise without the risk of going short by buying puts. Or you can sell them both and profit from no movement at all.

Here’s your beginner’s guide to the bullish half of the options duo – call options:

The Defined-Risk Bullish Bet

PTON \ Peloton

Source: Yahoo! Finance (https://finance.yahoo.com)

One of the most popular ways to use call options has been for cheap, defined-risk bullish exposure. Take Peloton stock, for example. You could buy a few shares of PTON at around $25 apiece with the full risk potential of the market collapsing to $0; or, you could buy the 30 strike calls in April for a total of $90, which would entitle you to the potential success of 100 shares of PTON if the price can get back above 30 while only risking $90,no matter how low the stock goes.* The drawback: your probability of profiting from this strategy is much less than your 50/50 odds would be when buying shares.

 The Long Stock Hedge with Edge

TSLA \ Tesla

Source: Yahoo! Finance (https://finance.yahoo.com)

Then there’s the part calls play in the oft-used covered call strategy. Say you’re long 100 shares of Tesla from way back, and, while you don’t want to get rid of those shares quite yet, you want to place a hedge on top of your position given how far your stock has come. You can sell a call at a strike price much higher than the stock’s current price and receive a few bucks if the market moves lower, sideways, or even a little higher. The drawback: if TSLA goes on a big bull run past your short call strike price, then you will theoretically lose your shares’ exposure.

The High-Probability Short

SPRE \ Small Precious Metals

Source: dxFeed (https://indexit.dxfeed.com)

Finally, you can sell the call option alone thereby creating short exposure with a theoretically higher than 50% chance of profiting. For instance, if gold and silver rally back to their highs and you think the market will fall back but aren’t so confident to sell the outright SPRE futures, then you can sell a call at a strike price higher than the futures price. This strategy entitles you to the credit you sold the call for as long as the market is below your strike at expiration. The drawback: the short calls exposure grows to a full contract or 100 short shares as the underlying market encroaches and surpasses your strike price.

Options can giveth and taketh away in many manners, but using calls and puts to downsize risk can be especially helpful in a volatile market.

*All example data taken on 3/4/22

—

To learn more about how the Small Exchange is merging the efficiency of futures with the clarity of stocks, make sure to subscribe to their YouTube channel and follow them on Twitter so you never miss an update.

© 2022 Small Exchange, Inc. All rights reserved. Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information in this advertisement is current as of the date noted, is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading futures involves the risk of loss, including the possibility of loss greater than your initial investment.

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Filed Under: Tips & Strategies

About Frank Kaberna

Frank Kaberna is the head content strategist at the Small Exchange. He produces everything from brochures to videos that inform on the Small Exchange’s products. After earning a mathematics degree from the University of Michigan, Frank traded interest rates at the Chicago Board of Trade. He then worked on the tastytrade Network as a content producer and on-air talent before landing at the Small Exchange.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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