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Option strategies buying
call options
Bullish strategies
The call option gives the buyer the right,
but not the obligation, to purchase the
underlying stock at a predetermined
price over a specified time period.
The predetermined price is called
the strike price. Listed options have
expiration dates on the third Friday of
every month. The purchase price of the
option is referred to as the premium.
These option contracts each represent
100 shares of the underlying stock.
Therefore, the purchase of 10 calls
would give the holder exposure to 1,000
shares of the stock.
Long call example
With the underlying stock trading at $30,
an investor may choose to purchase a
call option that expires in two months
with a strike price of $30. The investor
pays a $2 premium for the right to
buy the stock at $30 for the next two
months. The underlying stock price
must be trading above the options strike
price plus the premium paid ($32), by
the expiration date, for the investor to
realize a profit. This price is referred
to as the break even price. Once the
stock has exceeded this price level, the
investor participates point for point as
the stock moves higher. Conversely, if
the stock price declines and finishes
below the call strike, the investor stands
to lose 100% of his or her investment.
While this sounds harsh, remember the
$2 investment represents a fraction of
the price to purchase the stock outright.
If the investor had purchased the stock
for $30 and it subsequently declined
to $20, he or she would have a $10 loss
on the position. This is a much larger
loss than the option investor would
experience. This is an example of the
limited risk that options buyers enjoy.
10
8
6
Long Call
4
2 Up to this point, we have been looking
0 at option values at expiration. Option
-2
-4
-20 22 24 26 28 30 32 34 36 38 40
-2 -2 -2 -2 -2 -2 -2 -2 4 6 8
n Stock price
n Long Call P&L at expiration
Options are a wasting asset!
An options premium is made up of
two components: intrinsic value and
time value.
Options premium example
With the underlying stock trading a $32,
the three month $30 strike call trades at $3.
Intrinsic value = $2
+ Time value = $1
Premium = $3
In this example, if the stock remains
at $32 until the expiration date, the
option will lose its entire time premium
and would trade at $2 (the intrinsic
value). A call option with a strike price
that is greater than the stock price is
considered out of the money and
has no intrinsic value. This options
premium is comprised of time value
only. If the underlying stock price
remains below the option strike price
this option will have no value at the
expiration date. The erosion of time
value tends to accelerate as the options
expiration date approaches.
premiums will fluctuate with the stock
price throughout the life of the option.
The measurement of this movement
is referred to as DELTA. DELTA tells us
how an options price should react to a
change in the underlying stock price.
DELTA option example
An option with a DELTA of .50 would
be expected to move $0.50 for a $1.00
move in the underlying stock. This
option has a 50% correlation to the
stock price. A good rule of thumb to use
is that all options whose strike price
is equal to the current stock price will
have a DELTA of approximately .50. A
call options DELTA will increase as the
stock price moves above the calls strike
price. The further the call option goes
in the money, the higher its DELTA
becomes, and therefore, the greater its
correlation with the movement of the
underlying stock. Conversely, if the
stock price declines below the options
strike price, the DELTA will decrease
and the option will be less influenced by
the stocks price fluctuations. As you can
see, an options DELTA is dynamic and
will change as the stock price changes.
Page 2 of 2 Option strategies buying call options, continued

Because buying call options can be

viewed as a substitute for buying the
underlying stock, investors should
only purchase the same number of
call options that they would round lots
of stock. As stated earlier, options are
a wasting asset and while they offer
limited risk they have the potential of
expiring worthless. Buying an excess
number of call options is an example of
over-leveraging.

A few things to remember

Buying longer-term options gives
the underlying stock more time to
perform as expected and helps delay
the accelerated time decay as
expiration approaches.
Buying in-the-money call options
gives you a higher correlation with the
movement in the underlying stock.
Buying an equivalent number of call
options as you would round lots of
stock will help reduce the risk of over-
leveraging.

This strategy sheet discusses exchange-traded options. It is not to be construed as a recommendation to purchase or sell a security. Before engaging in the
purchasing or writing of exchange-traded options, investors should understand the nature and extent of their rights and obligations and be aware of the risks
involved, including the risks pertaining to the business and financial condition of the issuer of the underlying stock. Listed options are not suitable for all investors.
Prior to buying or selling an exchange traded option, a person must be provided with, and review, a copy of CHARACTERISTICS AND RISKS OF STANDARDIZED
OPTIONS. A copy of this document may be obtained from the RBC Wealth Management Compliance Department, 60 South Sixth Street, Mpls., MN 55402
Phone: (612) 371-2964. Additional supporting documentation including statistics and other technical data are available upon request.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC. 2016 All rights reserved. 7101 (01/16)