Snap (SNAP) powered higher Wednesday and closed near the high of the day, up 3.3%. It was up 1.5% Thursday morning.
Investors who think Snap stock is due to rally and don’t want to risk significant capital can use long call options rather than buy the stock outright.
A call option is a contract between a buyer and seller. The contract gives the buyer the right to purchase a certain stock at a certain price (the strike price) up until a certain date (the expiration date).
One of the benefits of call options is that they provide leverage (this can be both a good and a bad thing).
Assuming an investor wants to buy 100 shares of Snap stock, he or she would have to invest around $7,860 at the current price.
Call Option On Snap Stock Costs $980
Instead, the investor could gain a similar exposure using a fraction of the capital by buying a call option. One call option gives the investor exposure to 100 shares.
If an investor were to buy one Snap 70-strike call option expiring on Oct. 15, the cost would be only around $980 rather than $7,860.
The break-even price for this call option is equal to the strike price plus the premium paid, which would make the break-even price 79.80.
The most the trade can lose is the premium paid of $980, which would occur if SNAP finished below 70 on Oct. 15.
However, if Snap stock shoots higher, the upside is unlimited.
Using options in this way can be a great way to gain exposure to a stock without risking as much capital as would be required to buy the stock outright.
Reduce Risk By Selling Out-Of-Money Call
Savvy traders can reduce the risk by selling an out-of-the-money call, turning the trade into a bull call spread.
For example, selling the Oct. 15 expiration 85-strike call would reduce the trade cost by around $190 but would also limit the upside above 85.
Snap is set to announce earnings around the end of October, so this trade could have earnings risk.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
YOU MIGHT ALSO LIKE: