Saturday, August 24th, 2019

Buy Calls on Depressed Stocks


Just how low can depressed stocks go before they become attractive bargains? It may be time to buy calls on depressed stocks as bad news from Europe seems to be dragging everything down with it. Stocks fell recently as investors worried again that another Euro Zone bailout, Spain this time, was not going to be enough. Then bargain hunters stepped in as share prices fell below what fundamentals would reasonable tell us to be the lower limit of stock price. There is so much news these days, good, bad, and just plain confusing coming out of Europe. In such times of economic, political, and social uncertainty markets become volatile. There are great profits to be made and a fair amount of risk to deal with as well. Buying options gives the trader the opportunity to hedge his risk and gain profits as well. If the trader does his homework he can find opportunity at such times, consider European stock options , buy calls on depressed stocks, limit his risk and gain handsomely.

Buying Calls versus Puts

What are calls and puts ? A call is an options contract in which the buyer purchases the right to buy an equity such as a stock or commodity futures contract. He purchases the option to do so which he will only execute, on or before expiration date, if doing will result in a profit. A put is an options contract in which the buyer purchases the right to sell an equity such as a stock or commodity futures contract. As with the call option he will only do so if the sale will result in a profit. If you are going to buy calls on depressed stocks you believe that they will rise again in price. You limit your investment risk to the size of the options contract. When trading American style options the owner of the contract may execute it on or before the date of expiration. If he purchases a European style options contract he can only execute the contract on the date of expiration. However, with puts and calls and both styles of contract the buyer can sell his contract at any time prior to expiration. This, in fact, is the more common practice. When a stock price goes up its call contract rises in value as well. When a stock price goes down its put price becomes more valuable. If a trader sells his options contract his profit is the difference between the purchase price and the sale price. If you buy calls on depressed stocks you need never touch the stock. This fact can provides a degree investment leverage.

Buying versus Selling

Over the long term options seller tend to make more money than options buyers. They set the price which they are willing to accept for an options contract. In return they accept the risk that the market might move very unfavorably causing catastrophic losses. In general, only wealthy professional traders and large investment houses engage in large scale options selling. But, there is one exception. This is the covered call option . Let’s say that you own 100 shares of XYZ Corp., a depressed stock. You firmly believe that the stock price is not going to rise significantly in the next few months. You can sell a call option on these 100 shares and receive payment. This can be like receiving an extra dividend check from someone who want to buy calls on depressed stocks (yours). It is a safe way to make a little extra money on your stocks. However, if the market recovers and the stock price jumps up you will miss out as the buyer will then purchase you stock, at the original price, not the new price.

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