Options educational content provided courtesy of ChartBender.
May 2, 2008
Using Index Options to Profit from a Rebound
Will financials make a comeback? Sure. But when? If you think they might recover between now and January of 2010, an easy way to play that notion is by purchasing a January 2010 call option on a financial firm. But which option on which financial security?
Well, if you're not sure which of the financial firms can weather the storm, then the Select Sector SPDR Trust for financials could be a good vehicle. The ticker is XLF, and it's an index based on companies in the financial sector. In fact, it holds most of the names that have been making the headlines of late. It also happens to have options you can trade on it.
Financials led the market into the pits, and they will likely lead the markets out. With XLF still off of its highs by about 27%, it could be in bargain territory. A recovery back to previous highs means a 38% gain from current levels. XLF is at $27.52 as of this writing. At $3.80 per contract, the Jan 2010 28 call is going for a 13.8% premium to the stock price. The 28 calls are also $0.48 out-of-the-money, so the trade requires XLF to be more than 15.55% higher by the time expiration rolls around in 2010 in order for the calls to be profitable. But it will have that much of a gain even before it is halfway to full recovery.
This might be a consideration for a speculator with the right appetite for risk.
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This is not a solicitation or recommendation to buy any securities, options or financial instruments of any type. Any information in this email is for educational purposes only.
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Using Index Options to Profit from a Rebound
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