WallStreetSignals.com

The Largest Stock Market "SCORING" Source on the Internet. .

Option Strategies

Feb. 2012

Here, we explore Buying a Stock or Index vs. Buying an Option Spread on the Stock or Index….

A. In this example, if we consider Buying 100 Shares of NASDAQ 100 at a Price of $62 , we will have to put up $ 6200

1). If we set a Target Price of $65 , we will earn a Profit of $300…

2). This would be a % Return on our Amount Invested of 5 %

3). If the Stock drops 10% in Price, our Loss would be $-620

OR...B. In this example, if we consider Buying an Option Spread , we will have to put up $ 34

1). If we set a Target Price of $65 , we will earn a Profit of $66…

2). This would be a % Return on our Amount Invested of 194 %

3). If the Stock drops 10% in Price, our Loss would be $-34

Here are the Details :

C. If we Buy the Stock . . .

Stock:

Symbol:

Price:

$ Amount Invested per 100 Shares:

Target Price:

Target Price $ Profit:

Target Price as % Return on Amount Invested:

Loss if Stock Drops 10%:

NASDAQ 100

QQQ

$62.00

$6,200

$65

$ 300

($620)

D. If we Buy the Option Spread . . .

Buy This Option as Part of the Option Spread . . .

Buy / Sell:

Expire Date:

Strike Price:

Put / Call:

Option Price:

$ Amt. Paid for Option:

Option Symbol:

}

Net $ Amount Invested:

Target Price:

Target Price $ Profit:

Less - Net $ Amt. Invested:

Net $ Profit:

Net Profit % Return on Amt Invested:

Max Loss:

Max Profit:

Buy

4/21/2012

Call

$0.97

$97

QQQ120421C64

Sell This Option as Part of the Option Spread . . .

$34

$65

$100

($34)

$66

194%

($34)

$66

Buy / Sell:

Expire Date:

Strike Price:

Put / Call:

Option Price:

$ Amt. Rcv. for Option:

Option Symbol:

Sell

4/21/2012

Call

$0.63

$63

QQQ120421C65

E. Comparison Summary - Buying the Stock vs Buying an Option Spread on the Stock….

# of Shares:

Price of Stock:

$ Amount Invested:

Target Price:

Target Price Net Profit:

Net Profit % Return on Amt Invested:

Loss if Stocks Drops 10%:

No. of Days Option Spread is in Force:

1). Buying The Stock -->

100

$62.00

$6,200

$65

$ 300

($620)

Unlimited

2). Buying the Option Spread -->

100

$62.00

$34

$65

$ 66

194%

($34)

F. Conclusion :

1). Buying a Option Spread on the Stock instead of Buying the Stock itself, will cost $6134 LESS in $ Amount Invested.

2). Buying a Option Spread on the Stock instead of Buying the Stock itself, could result in a 194 % Return vs a 5 % Return on your $ Amount Invested, if the Target Price is reached.

3). Buying a Option Spread on the Stock instead of Buying the Stock itself, could result in a Max Loss of $ -34 vs a Loss of $-620 if the Stock DROPS 10% in Price.

4). Buying a Option Spread on the Stock instead of Buying the Stock itself, could result in a Max Loss of $ -34 if the Stock does NOT reach the Targe Price by 4/21/2012

G. Profit & Loss Summary :

Here is what you can Earn in Profits or suffer in Losses as the Stock moves UP, DOWN or SIDEWAYS between now and the Expiration of the Option Spread. . .

1). If this Stock stays at the same price over the next 73 Days, you will have a Total Net Loss of $ -34

2). The Breakeven Price of this Stock is $ 64.34 which means the Price needs to go ABOVE that Price before you will earn a Profit

3). The Price of this Stock needs to get to $ 65 or Higher to earn the Max Profit. No matter how much Higher the Price goes, you will only earn the Max Profit.

4). The Price of this Stock could drop all the way to $ 0 and the Max Loss on this Option Spread would be $ -34

5). Since the Option Spread can be Sold at anytime prior to Expiration, when the Stock Price gets to any of the Prices shown below before Expiration, you can elect to Sell the Spread.

The Profit & Loss Summary for this Call Option Spread :

Rate of Return :

$97.50

And Higher

$66

This would be a Rate of Return of 194 % Return on the Original Investment of $ 34

Max Profit =

$65.00

And Higher

$33

Average Profit =

$64.34

= Breakeven Price

($17)

Average Loss =

Current Price

$62.00

= Current Price

This would be a Minus 100 % Return on the Original Investment of $ 34

Stock Price

($34)

Max Loss =

From Current Price to - $ 0

Today

04/21/12

This Option Spread can be sold at anytime during this Period to Book a Profit or Loss.

Important Notes :

1. All figures do not include commissions. The commission on buying 100 shares of stock should be around $8 - $10. The commission on buying an Option Spread should total around $8 to $14.

2. When you Buy a Stock, the Profit potential is theoretically unlimited. When you Buy an Option Spread, the Profit potential is limited to the difference between the Strike Prices of the Option you Buy and the Option you Sell…LESS the Net Amount Paid for the Option Spread.

3. When you Buy an Option Spread, there is an Expiration Date when the Spread expires. If the Price of the Stock does NOT exceed the Strike Price of the Option you Buy by the Expiration Date, then you will not make a profit and will lose the Net $ Amount you paid for the Option Spread.

4. Regardless of how much the Stock drops in Price, the Max Loss you will be exposed to is the Net Price you paid for the Option Spread. If you own the Stock, however, you will be exposed to a loss equal to the drop in Price of the Stock.

5. 1 (One) Option is equal to 100 shares of the Stock or Index.

6. The Price of an Option is multiplied by 100 to arrive at the $ Amount you will Pay or Receive for the Option. If you sell an Option, you will be credited with the Option Price times 100.

NOTE: WallStreetSignals.com is NOT a broker, bank or financial institution and does not buy or sell securities. WallStreetSignals.com has no financial interest in any of the stocks mentioned here and does not receive any compensation for mentioning any of these stocks. All the data used to calculate ratings and scores are obtained from recognized sources but has not been verified by us and cannot be guaranteed to be accurate or complete. Every effort has been made to insure all data is accurate but errors by data sources or others cannot be considered the responsibility of WallStreetSignals.com. This page is not an offer to buy or sell any securities and any data on this page cannot be considered a recommendation to buy or sell any security. Please consult an investment professional before making any investment decisions.

Copy Right 2007-2010 WallStreetSignals.com