Intro to Options

Implementation

Onboarding

Long Call

Payoff graph for long call position

If Alice pays $5 to buy the JAG June 30th 110 call option, she is buying the right to pay $110 for one JAG token on or before June 30th. The $5 she pays is called the **premium**. Let’s compare the outcomes of buying one of these calls for $5 to buying JAG for $100. We'll examine three scenarios that could occur on June 30th:

- 1.The price of JAG rises to $130
- 2.The price of JAG remains at $100
- 3.The price of JAG falls to $70

- If Alice had bought one JAG for $100, she would make $30 on her investment (+30%)
- If she had bought the June 30th 110 call for $5, she can purchase the coin for $110 and sell it for $130, netting $15 profit. Factoring in the $5 cost of the option, she has profited $20 - $5 = $15, making for a 300% (!!) return on her investment.

- If Alice had bought one JAG for $100, she would be flat (price unchanged).
- If she had bought the call for $5, so she would lose $5 (-100%). The option is worthless as the strike is greater than the token price.

- If Alice had bought one JAG for $100, she would lose $30 (-30%).
- If she had bought the call for $5, she would lose $5 (-100%).

These scenarios illustrate a couple of key points about options:

- They are great sources of leverage: In Scenario 1 Alice makes a return 10x greater than had she simply purchased JAG
- They protect buyers from downside: In Scenario 3 Alice only lost $5 compared to losing $30 had she bought the token. Note that she still retained the upside in the case that JAG had increased in value.
- They do poorly when the price of asset doesn’t move much: In Scenario 2, Alice loses her entire investment (-100%) compared to being flat had she bought the token.

When you own a call your upside is unlimited (since stocks can go up indefinitely), and your downside is capped at the price you paid for the call.

Last modified 6mo ago

Copy link