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That is a 936% ROI. But let’s be realistic, if this investor was prepared to invest $5,340 and $300 was mad money that could be outright lost then chances are she would have bought more than 10 Call Contracts and/or a combination of Options, Warrants, and Shares. The volume of that specific Call that day was 20 Contracts … imagine turning $500 into $10,500 in just two months time. This link to the Montreal Exchange’s Options Page allows you to look up the current or historical price of any Option of any company that trades on that exchange. If you are similar minded to this hypothetical investor, there are many Call options available for pennies because the strike price is so high compared to the current share price so always be prepared to lose 100% of that investment.
EXAMPLE 2:
WRITING A COVERED CALL (“SELL TO OPEN”)
In this example, we will assume that our example 1 retail investor bought 1,000 shares of ACB for $5,340 when the share price was $5.34. She immediately wrote 10 Calls against her 1000 shares and selected the January 18, 2019 expiry with an $11 strike price. She received $0.30 for each of the 10 contracts for a total of $300. Owning the underlining shares is referred to as a “covered call”. Typically a broker uses one of the following “commands” to write a covered Call Option: “sell to open,” “sell” or “write. Now on October 15th, 2018 the investor who bought these 10 contracts chooses to exercise his right to buy 1000 shares for $11. The Investor that wrote the calls receives $11 per share for a total of $11,000 plus the $300 that she sold the options for. This of course is an inferior position to not having wrote the options and instead selling 1,000 shares of October 15th for $15.22 for a total of $15,220. You can reverse engineer this to ensure it is a zero sum game by running this same scenario then assuming that she used the the $300 received to “sell to open” to buy 10 contracts for $0.30 each.
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