Current price of GameStop: $28.3
Assuming the investor believes GameStop will rise to $35 within a month
Buy a call option with a strike price of $29, costing $290
Sell a call option with a strike price of $35, generating $115 in income
Net initial cost: $290 - $115 = $175
Maximum risk: $175 (initial investment)
Maximum profit: $425
This strategy is suitable when the investor expects the stock price to rise to a specific range ($35 in this case) but not exceed the higher strike price.
Strategy details:
Buy call option
Strike price: $29
Option cost: $290
Sell call option
Strike price: $35
Option income: $115
Net initial cost: $175
Maximum risk: $175
Maximum profit: $425
Advantages:
- Limits risk and reduces initial cost
- Captures upside potential with fixed profit at higher strike price
Disadvantages:
- No profit from additional upside beyond $35
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