I will use Apple trading at $561.
If we buy the August $540 strike price calls, it will cost us about $61.40. For a price of $6,140, we can effectively gain exposure to Apple for about 12% of the cost of buying the stock. We won't get a dividend directly when buying options, but dividend payments are calculated into the pricing of options for the most part. Since Apple is trading for $561, it means the cost in time premium is about $20 per share. Even if Apple does move up as hoped, we may not realize any gain with this trade. So let's add another leg to the trade.
We can also sell the $600 strike price option. This hedges the long $540 call. As of this writing, we can sell the August $600 for about $34.60 per share or $3,460 per contract. By selling this call option and creating what is known as a spread trade, we limit our profit potential; however, we also lower our risk in price per share as well as cost in time. Our total cost for the spread will be about $2,680. This is known as a bull call spread, or "bull debit spread."
The "cost" of the spread beyond the upfront price paid is the loss of profit if Apple moves above $600, so we know if Apple trades at $600 or more, we maximize our gains. Let's take a look and see how much that will be. The upfront cost is $2,680, but the value of the August $540 strike call will be worth $6,000 ($600-$540). This would be more than a double and the best case one can hope for.To at least break even, Apple will need to trade at or above $567, which is about $6 more than at the time of this writing. At a price of $540 and lower, the total $2,680 is fully lost. This sounds extreme to watch the entire premium lost, but keep in mind the buyer of the stock at $561 loses $2,100 of their investment at $540 and at an Apple price of $534.20, an Apple stock buyer loses the same amount ($2,680) as the option investor does. If Apple's price falls below $534.20, the stock buyer faces even larger losses compared with the option buyer.
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