Comments

11/23/2020


We will analyze this option using the Call Option Purchase calculator. The Call OptionPurchase calculator will show the profit potential for a call option purchase based onthe price change in the underlying stock/ETF at option expiration. The price changeshown in the example below ranges from a 0% change to a 12.5% increase.We developed what we call the 1% Rule to help us select an option strike price. The 1%rule says to limit the time value portion of the option to less than 1% of the stockprice. If you limit the time value portion of an option to 1%, the stock price onlyhas to move down 1% for the put to breakeven and start profiting.The calculator will also calculate the time value portion of an option. With this optionpurchase, the time value is 1.09 points (boxed in red). The time value of 1.09 is lessthan 1% of the 140.06 stock price, so this strike price qualifies under the 1% Rule.The second row from bottom of the calculator lists the dollar profit potential. The bottom row lists the percent return profit potential. We cansee that if the ETSY stock increases 1% at option expiration (boxed in green) a 1.2% or $31 profit will be realized. This confirms the1% Rule of profiting with only a 1% increase in the stock price.

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