Index Strategy Discussions

For the sake of simplicity, taxes, commissions and other trading costs have been omitted from the discussions and strategies in this discussion; these should be taken into account when making your investment decisions. The strategies are based on hypothetical situations involving a European-style, cash-settled index and should only be considered as examples of potential trading approaches.

Buy Index Calls to Participate in Market Advances

Review the strategy discussion below and then test your knowledge with our downloadable strategy pack

Assumption: The YZX index is at 78

You believe YZX will rise between 5 and 10 percent in the next quarter. A three-month 78.00 strike call option is trading for 3-1/8. You may purchase two of these at-the-money calls for a total price of $625 (3.125 x 2 x $100 = $625). You risk the entire $625 if YZX does not climb above the 78 mark at the end of the three months. Outlined in the chart below are several scenarios at the end of the three months.

Outcome 1: YZX rose by 10 percent.

Your forecast was realized, and the YZX settlement value was calculated as 85.80 on the day before expiration. You can exercise your call and receive the in-the-money amount of $7.80 (85.80 - 78.00 = $7.80) per contract for a total of $1,560 ($7.80 x 2 x $100 = $1,560). Your profit is $935 ($1,560 - $625 = $935).

Outcome 2: YZX rose by 2.5 percent.

You were correct in direction but wrong in magnitude. The YZX settlement value at expiration is calculated as 79.95. The call buyer can exercise and receive an in-the-money amount of $1.95 (79.95 - 78.00 = $1.95) per contract, for a total of $390 ($1.95 x 2 x $100 = $390). Although the call ends up in-the-money, there is a net loss of $235 ($625 - $390 = $235) on the investment because the in-the-money amount is less than the price paid. For these calls to break even, YZX would have to move approximately 4 percent to a level of 81.125. The break-even is calculated as the strike price plus the premium paid [(78.00 + 3.125) x 100 = 8,112.50].

Outcome 3: YZX remained at or below 78.

You were incorrect in the timing and direction of your forecast, and the market has not risen above the strike price level. In this case, you lose the entire call option investment of $625. This is the maximum you can lose, no matter how far YZX falls.

Buy YZX Call Strategy - Summary

Possible outcomes of investing in two YZX 78.00 calls
at a premium of 3-1/8
LEVEL OF YZX at expiration Move in the YZX Index Expiration value of two 78.00 calls Less: premium paid (2 calls @ 3-1/8) Net gain/loss*
70.2 -10% 0.00 -625.00 -625.00
74.1 -5% 0.00 -625.00 -625.00
76.05 -2.50% 0.00 -625.00 -625.00
78 0% 0.00 -625.00 -625.00
79.95 2.50% 390.00 -625.00 -235.00
81.9 5% 780.00 -625.00 155.00
85.8 10% 1,560.00 -625.00 935.00
* Exclusive of commissions and taxes

Basics of Call Purchase
Profit & loss characteristics Profit potential will be theoretically unlimited. The loss potential is limited to the premium paid for the call.
Break-even point The break-even point is an index level equal to the strike price of the call plus the premium paid for the call. An index level higher than that will be profitable, while a lower level will be unprofitable.
Time decay As time passes, the time value portion of the premium will erode. At expiration, the call's value will equal its intrinsic value.
Volatility An increase in volatility usually increases the time value portion of the option's premium. A decrease in volatility will usually hurt this type of position.


Download the Buy Call Strategy Pack

Download the Buy Call Strategy Pack (self-extracting zip archive using YZX index options as an example - Look below for step-by-step instructions on how to download this file.) The Buy Call Strategy Pack includes the Strategy discussion (same as above) in a text file format, a list of Frequently Asked Questions concerning the worksheets and a fully functional Microsoft Excel® spreadsheet. The spreadsheet allows you to enter and change variables, and to see the outcome graphed. The spreadsheet requires Microsoft Excel® version 5.0 or newer (or compatible) to function properly.

How To Download and Open the Self-Extracting Strategy Packs

  • Microsoft Windows® users:
    1. click on the link
    2. save the file on your local hard disk to a temporary directory of your choice (the zip file is about 160 K)
    3. using File Manager or Windows® Explorer, navigate to that directory
    4. doubleclick on the downloaded file to activate the self-extraction process.

      A WinZip™ dialog box will appear. It gives you a choice on where to extract the files to. Unless you specify another directory, the files will automatically be extracted to a default directory named c:\cboe that the program will create. It will also create subdirectory named index. Note: The default directory is the same for all the strategy packs, so if you download more than one, they will be grouped together in the same directory (c:\cboe\index\).

    5. click "unzip" to extract the files
    6. click "OK" (verification box)
    7. click "close" to close the archive extraction program.

    8. Start a text viewer (such as notepad.exe) to access the text files or Microsoft Excel® to open the .xls spreadsheet. Please view the readme.txt file for the most up to theminute information about the spreadsheets.

  • Other operating systems:
    • Self-extraction is only available to users of Microsoft Windows®. Users of other platforms should use a zip-extracting utility such as PKunzip™ to open and extract the archived files.


Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document are available from your broker or the Chicago Board Options Exchange, 400 S. LaSalle Street, Chicago, IL 60605. The OCC Prospectus contains information on options issued by The Options Clearing Corporation. Copies of this document are available from The Options Clearing Corporation, 440 S. LaSalle Street, 24th Floor, Chicago, IL 60605 or the Chicago Board Options Exchange, 400 S. LaSalle Street, Chicago, IL 60605. The documents available discuss exchange-traded options issued by The Options Clearing Corporation and are intended for educational purposes. No statement in the documents should be construed as a recommendation to buy or sell a security or to provide investment advice.