The investor buys a call option and sets aside in a risk-free interest-bearing instrument enough cash to exercise it.
This strategy is the equivalent of a rain check for the underlying stock because it allows an investor to postpone the purchase decision. The call guarantees a maximum purchase price during the life of the option while leaving the investor free to take advantage of any downturn that might occur in the stock price.
If the stock rallies above the strike price, a call owner can consider exercising or selling to close, hopefully at a higher price. If, on the other hand, the stock is below the strike at expiration, the call expires worthless.
However, by purchasing the call option, the investor locked in an opportunity to re-consider the stock purchase. Assuming that the long-term outlook for the stock still looks good, it might be a great time to buy the stock at the new, lower market price.
If the stock’s prospects now seem fundamentally worse, the investor ‘dodged a bullet by only risking the call premium. The remaining capital is still available for other investments.
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