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February 9, 2022
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Picking Winning Trades In Extreme Volatility
with Wendy Kirkland

Tuesday, February 15th at 7pm EST

The clock is ticking and the opportunity to multiply and accelerate wins won’t last long. It may seem like the wild markets are a time to back away but that couldn’t be farther from the truth. With the right trading strategies, these big moves have the potential to put more money in your account faster.

Wendy Kirkland has been helping traders harness this exact type of volatility and now she is going to walk us through her top performing programs LIVE.

If you want to see how to use the big drops we have recently seen to your advantage, sign up for this event RIGHT NOW!

Sign up now and put this event on your calendar. That note will be a great reminder of the day your financial dream became achievable.

Tuesday, February 15th at 7pm EST
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Call Option Purchase: Profit and Loss Potential
by Don Fishback

A call option gives the option buyer the right to buy an underlying asset at a predetermined price. Also, whenever we buy something, we have to give the seller money, so money is debited from our account. When we sell, we receive money from a buyer, so money is credited to our account. After buying something, we need to sell it in order to realize a profit or loss.

Let’s take an example of a GE call option purchase. It’s April, let’s assume GE is currently trading at 100. You want to acquire the right to buy GE shares if they increase in value between now and June, so you buy a call option with a strike price of 100 and an expiration date of June 20. Remember, the strike price is the price at which the option can be exercised. This means that you will have the right to buy GE shares at 100 before the June options expire on June 20, no matter how high or how low GE shares are.

The seller of the option, who will be obliged to deliver to you the shares of GE if you ask for them, requires compensation for giving you the right to buy GE at 100. The compensation you give him (e.g. the price of the option you pay) is called the option premium. The price of the option in June is 5. All stock options are worth $100 per point. Therefore the GE option costs $500.

Now let’s fast forward to June. Let’s look at what your profit or loss will be as GE shares fluctuate. Remember, the June call option with a strike price of 100 gives you the right but not the obligation to buy GE shares at 100 before June 20.

If GE shares are trading at 80 on the New York Stock Exchange, would you want to exercise your right, call away the stock and pay 100? Of course not. Why would you want to pay 100 when the open market price of GE is 80? Therefore, when GE shares are at 80, the option has no “exercise” value. In this case, it would be worthless at expiration. If you tried to sell the option, no one would want to buy it. So you just let it expire.

If you let the option expire worthless, the transaction looks like this:
image
How about if GE is trading at 90? It would be the same thing. No one would want to pay 100, as is your right, if you can buy GE in the open market at 90. Therefore, when GE shares are at 90, the option has no “exercise” value. Just as the above example, it would be worthless at expiration. You just let it expire.

In both instances, there is no value in exercising the option, so the option expired worthless.

What if GE shares were at 100? In this case, it really doesn’t matter. You could either buy the shares in the open market for 100, or exercise your option for 100. At the very least, one could state that there is no added value to exercising the option, so it is essentially worthless.

How about 110? At 110, the options have value. You could exercise your right to “call” away and buy GE at 100 and then instantly sell the shares in the open market at 110. In this case, you make 10 from exercising your option. Also, as we discussed, you would simply offset the transaction by selling the option. If you sold the option for its exercise value (10), it would show up on your account as a plus and the transaction would look like this:
image
If you sell the option, you would still gain 500.00.

Finally, what happens if GE shares go to 120? Again, you could exercise your right to “call” away and buy the shares at 100, and then sell them at 120, making 20 from the exercise. Or you could simply sell your option in an offsetting transaction.

Remember, the option starts gaining value once GE shares start climbing above 100. However, let’s say the option finishes its purchase breakeven at 105. If GE finishes below 105, the option buyer loses. That’s because the option does not gain enough value to overcome the purchase price. If it finishes above 105, the option buyer will earn a profit.

Notice that the breakeven price is equal to the price of the option when purchased (5), plus the option’s strike price (100) [5 + 100 = 105]. This is a simple rule of thumb for calculating the breakeven of a call purchase.

Here are the important characteristics of call buying:
  1. Small Cash Outlay – Compared to buying the asset, the cost of a call option is much smaller.

  2. Bullish Bias – The underlying asset must go up in order for you to make money.

  3. Limited Risk – If you’re wrong and the underlying asset declines in value, your maximum loss potential is limited to the purchase price of the option.

  4. Unlimited Profit Potential – If you’re right about direction, the profit potential is virtually unlimited. The percentage profit available is much larger than the risk potential.

  5. Poor Probability – Most traders find it almost impossible to accurately guess direction consistently. When you purchase an option, you not only have to be right about market direction, your forecast must take place during a limited amount of time (prior to expiration). In other words, you must guess direction accurately and your forecast has to take place quickly.

 
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