Simple Options S7 Question

Discussion in 'Professional Trading' started by bouncingsoul, Jun 23, 2005.

  1. I'm just starting to read the options section for my S7 and I have what I think will be a very basic question for you guys....One of the facts states:

    "The purchaser of a call option would limit the amount of money he could lose if the underlyning stock declined."

    I'm obviously missing something regarding the general theory behind this because I thought a call option is used for the intent to buy.....why wouldn't this help him leverage against increasing prices?

    I'm an idiot...what am I missing here?

  2. You have a lot of studying to do, have fun :)

    What you mentioned may be correct, but that's not the question or issue. If you buy an underlying for upside appreciation and it goes down, you lose 1:1 and can lose all the way to 0 if you hold it. However, if you buy a call for upside appreciation and the underlying goes to 0, your loss is limited to the price you paid for your call.
  3. Choad


    It's still a funky question.

    Of course you don't lose as much as the stock, but your loss - up to 100% if OTM @ expiry - is hardly limited if the stock drops to 0.

    I know they are trying to show the idea of a long call roughly being a "stock substitute" but with leverage. Still a misleading question IMHO, but I've never taken any of those tests...
  4. r-in


    Are the questions looking for essay answers or multiple choice or ? Not to be a smart ass, but would a simple "yes" work as an answer to that statement?
  5. The statement was an answer to a multiple choice question...
  6. Choad


    I'd say the answer would be "no". The purchaser of a naked long call option is not limiting his downside, only his total dollar amount loss when compared with 100 shares (or whatever) of stock.

    Sheesh! How do you say "yes" or "no" to option questions! :D
  7. Choad


    What was the question? :)
  8. Ebo


    NAKED implies you are not long/short the underlying!
    Therefore a purchaser of a Naked Call has a downside limited to his cost of the premium.

    Next question
  9. Choad


    Yeah, but it's STILL up to 100%, just like going long the stock...

    I think I'm probably reading more into it than necessary.
  10. r-in


    Choad, I think you are putting more into it, and I perhaps to little. You are right it is the same as the purchase of stock, 100% loss is the max. loss.
    #10     Jun 23, 2005