Index Options Strategies: Buying Index Calls - Part One
Basic Strategies
The versatility of index options stems from the variety of strategies available to the investor. The most basic uses of index options are explained in the following examples. These examples are based on hypothetical situations and should only be considered as examples of potential trading approaches.
Other strategies that might be used with equity options, such as spreads and straddles, can be employed with index options. For more detailed explanations, contact your brokerage firm or the exchanges where index options are traded.
Note: For purposes of illustration, commission and transaction costs, tax considerations and the costs involved in margin accounts have been omitted from this example. These factors will affect a strategyís potential outcome, so always check with your brokerage firm and tax advisor before entering into any of these strategies.
Note: For illustrative purposes, the index option positions in all of the following examples are shown to be held until expiration. The premiums are intended to be reasonable, but in reality will not necessarily exist at or prior to expiration for a similar option.
Strategy 1: Buying Index Calls
Market Outlook
Bullish over the short term
Goal
Positioning to profit from an increase in the level of the underlying index
You are anticipating an advance in the broad market or market sector measured by the underlying index in the near future. You want to take an aggressive position that can provide a great deal of leverage. This decision is made with the understanding that there is a possibility you may lose the entire premium you pay for the option.
An index call option gives the purchaser the right to participate in underlying index gains above a predetermined strike price until the option expires. The purchaser of an index call option has unlimited profit potential tied to the strength of advances in the underlying index.
To Be Continued in Part Two...
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