Selecting the Optimal Call Options
As the following chart shows, the price of shares in Rogers Communications Inc. cl. B (RCI.B) has just broken through $63, which has been a major resistance level since April. While there can be no guarantees, this bullish trend could take the stock to another resistance level over the next few months, at around $70.
Daily Chart for RCI.B ($64.08, Friday, July 6, 2018)
An investor interested in profiting from this scenario could buy call options expiring on October 19, 2018, choosing the strike that would yield the best return if the stock price reaches $70 on expiration of the options.
We will choose from among the following call options:
- RCI 181019 C 62 at $3.15
- RCI 181019 C 64 at $1.90
- RCI 181019 C 66 at $1.05
- RCI 181019 C 68 at $0.50
Position
Comparative Table of Call Options
As the above table shows, given these four call options, it is RCI 181019 C 68 at $0.50 that has the optimal combination of risk and return, offering a potential return of 300.00% if RCI.B reaches the target price of $70.00 on October 19, 2018. We will therefore carry out the following transaction:
- Purchase of 10 call options, RCI 181019 C 68 at $0.50
- Debit of $500
Profit and Loss Profile
Target price on the call options, RCI 181019 C 68 at $0.50 = $2.00 ($70 – $68)
Potential profit = $1.50 per share ($2.00 – $0.50), for a total of $1,500
Potential loss = $0.50 per share (the premium paid), or $500
Intervention
Even though the target price for RCI.B is $70.00, our potential profit is tied to the $2.00 target price on the call options. Therefore, as soon as the price of the calls reaches $2.00 we will liquidate the position, even if RCI.B has not yet reached the target price of $70.00.
Good luck with your trading, and have a good week!
The strategies presented in this blog are for information and training purposes only, and should not be interpreted as recommendations to buy or sell any security. As always, you should ensure that you are comfortable with the proposed scenarios and ready to assume all the risks before implementing an option strategy.
President
Monetis Financial Corporation
Martin Noël earned an MBA in Financial Services from UQÀM in 2003. That same year, he was awarded the Fellow of the Institute of Canadian Bankers and a Silver Medal for his remarkable efforts in the Professional Banking Program. Martin began his career in the derivatives field in 1983 as an options market maker for options, on the floor at the Montréal Exchange and for various brokerage firms. He later worked as an options specialist and then went on to become an independent trader. In 1996, Mr. Noël joined the Montréal Exchange as the options market manager, a role that saw him contributing to the development of the Canadian options market. In 2001, he helped found the Montréal Exchange’s Derivatives Institute, where he acted as an educational advisor. Since 2005, Martin has been an instructor at UQÀM, teaching a graduate course on derivatives. Since May 2009, he has dedicated himself full-time to his position as the president of CORPORATION FINANCIÈRE MONÉTIS, a professional trading and financial communications firm. Martin regularly assists with issues related to options at the Montréal Exchange.
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