Let's assume you think that BAC will jump to its price of 36 in October of 2008 sometime in the next two years. You have about $750 to invest. At the current price of 8.75 you could buy 85 shares. If you are right your $750 would be worth $3096 (86 shares at $36) Let's see how you can do better using calls. The January 2011 call with a strike of 10 costs $3.75, so a contract of 100 shares would cost $375. You could buy two contracts and control 200 shares. You will make money when the stock is higher than the strike price plus the cost of the option. That is you will break even when the strike is at 13.75. Again assume the stock hits 36. Your profit will be the value of the stock 36 less the cost of the option 13.75 or 22.25 per contract or $4450. 50% more profit using the call option.
Update on Bank of America Call
By drzBack in April you could have bought 85 shares of BAC for $750. BAC was at 8.75. On August 28 BAC was over 18 and your 85 shares would be worth about $1530 or you would have doubled your money.
The alternative is to buy 2 call options on BAC expiring in Jan 2011 for 3.75 each for a total of the same $750. Now that the price of BAC is over 18, the option is worth over 9.00 or 1800.
I will update this periodically and you can see the difference between buying stock and buying options over time.
$750.