Options  |  MAR 2006

Using Calls To Create Synthetic Leverage by Matthew J. Stander

Stocks & Commodities V. 24:3 (62-66): Using Calls To Create Synthetic Leverage by Matthew J. Stander Before you take the plunge and buy a call option, you should consider whether you know everything you can about doing so. Traders frequently buy call options to increase returns on long positions without first taking the time to understand the complexities of option pricing. For a sophisticated options trader with the ability to change positions in milliseconds, pricing models like Black-Scholes provide valuable guidance for establishing derivative positions. However, most traders could benefit from other analytical techniques that avoid the intricacies of complex calculus and cumulative log-normal statistical distributions. Analyzing calls based on the synthetic leverage they create is a powerful way to understand how in-the-money call options can benefit you. A better understanding of how call options create leverage will help you determine when to use calls and which call to buy. Modifying long trading strategies to use in-the-money call options for leverage may make your trading strategies much more appealing.

by Matthew J. Stander