An idiot discusses call options II
See part I for our initial discussion.
The second part of this post is to look at a potential trade of interest to folks who are looking into call options. Let’s stick with arguably Canada’s most controversial large-cap oil firm, Suncor.
I’ve picked two call options, one with an expiry of 16-SEP-22, and another that is longer-dated. Any option that has an expiration date of more than a year can be referred to as a LEAPS (Long-term Equity AnticiPation Security — huh? Don’t ask!). The one here gives us more than 400 days’ of flexibility, with a 16-JUN-23 expiry.
Per Shubham’s Price Target sheet, at $100 WTI/$4.50 AECO, the target price for SU is $88.26 CAD or $69.98 USD.
Based on the information you’ve absorbed since the oil disaster of H1 2020, and what you’re seeing today, how confident are you that WTI can stay above $80? What about $100 WTI or $120 WTI? If you’re pretty confident, then perhaps the risk that SU underperforms is adequately priced into the call options listed above. If so, perhaps you find them investable.
Let’s say we think that 75% of Shubham’s $100 WTI target is achievable by next June. 75% of $69.98 is ~$52.50.
So what if we bought five $45 call options for 16-JUN-23 based on Maundy Thursday pricing?
Our outlay:
Share price: $37.09
Strike price: $45.00
Premium: $2.11 * 500 (remember, each option is for 100 shares) = $1,055.00
** Please note, there’s an excellent chance you won’t pay a $2.11 premium. The bid-ask spread is dynamic, and can change at any time — especially if lots of people are getting into a specific trade. If SU is going up or down, expect the spread to move along with it. … Or not (sometimes, things don’t work logically — like the value of our beloved #COM stocks). **
Commissions to open/close call: $1.30 * 5 = $6.50
Total cost: $1,061.50
Our breakeven price =
($45.00 * 500 + 1,061.50) / 500 = $47.123 / share
If SU hits our target of $52.50, the profit is:
($52.50 - $47.123) * 500 = $2,688.50
A 153.3% gain on our $1,061.50 investment.
** What if SU hit $75 in the next 400 days? Your profit:
($75 - $47.123) * 500 = $13,938.50
This would be a 1,213.1% gain!
What if Suncor stays around $40? Kiss your $1,061.50 good-bye.
Let’s discuss, shall we?