How Call Options Can Offer Market Upside Without Traditional Stock Risk

A call is a right, but not the obligation, to purchase a stock or exchange traded fund at a future price, and at a future specific date in time, and in some instances prior to that time. The person who purchases a call is making a bet that the market for the underlying security will rise in the remaining time until the option expires. The person who “writes” the call is betting in the opposite direction: that the stock will not move up more than the price that is being received as payment for the contract.

Calls are used in many ways, but with the strategies that I employ, they are primarily used to create a synthetic position in a security without purchasing the actual security itself. As such, I am usually buying calls for clients “at the market“, meaning with a price based upon the current market price of this underlying security. Instead of buying the security, we buy the call. The risk of buying the call is that, if the stock or security ends up at the level it was at the time of purchase, or below, all the money spent for the call will be lost. This ultimately is not much of a loss to the client, however, because I have purchased another security, the interest on which usually makes up for the price of the call, making the investor largely or completely whole. In this fashion, the strategy provides the same, and in many cases additional Growth potential as the underlying security, but without the same market risk. This is because the bonds that are purchased have typically far less risk than the stock market overall. I am normally purchasing calls on an index, such as the S&P 500 stock market index, which helps measure the progress of 500 of the largest stocks on the American markets.

In short, buying a call or calls in this manner allows a client to participate fully, and in some cases to multiply, the returns of an underlying security or index, while the simultaneous purchase of a bond fund allows the investor to be made whole, if the stock does not rise before the expiration date, and typically to have less downside risk than the market overall if there is a market downturn.

Learn more about Structured Portfolio investing.

Investment advice offered through Aurora Private Wealth, Inc. an SEC-registered advisor.

Securities offered through APW Capital, Inc. Member FINRA/SIPC/MSRB

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