Investors who think ENTG 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 (strike price) up until a certain date (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 wanted to buy 100 shares of Entegris stock, he or she would have to invest around $12,000 at the current price.
Call Options Gives Exposure To 100 Shares
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 1 Entegris 105-strike price call option expiring on Dec. 17, the investor would only need to invest around $1,900 rather than $12,000.
The breakeven price for this call option is equal to the strike price plus the premium paid, which would make the breakeven price 124.
If ENTG stock stays below 124, the option trader loses the full $1,900.
However, if Entegris stock shoots higher after earnings, the upside is unlimited.
Selling Calls To Reduce Cost
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.
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 Dec. 17, 135 call would reduce the trade cost by around $350 but would also limit the upside above 135.
Entegris is set to announce earnings around the end of October, so this trade would 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: