What is a call on the maximum?

A call on the maximum is a special kind of deal that you can make without needing a middleman. You pay some money, called a premium, to buy the right to get a payout later. How big that payout is depends on two main things – a strike price that is set at the start and the highest price that something reaches while you have the deal. That “something” is called the underlying asset and it can be stuff like a stock, currency, index, or commodity.

Picking the strike price

You get to pick the strike price when you buy a call on the maximum. This is super important because it helps determine how much money you could make. Usually, you want to pick a strike price that is higher than where the underlying asset’s price is now. That way, you make more money if the price goes way up.

Following the underlying asset

After you buy the call on the maximum, you gotta keep a real close eye on the underlying asset’s price. Because your payout is gonna be based on the difference between the strike price and the highest price that asset hits. The underlying asset could be anything that has a price that changes a lot, like a stock, currency, commodity, or index.

An example of how it works

Let’s say the underlying asset is Company X’s stock. Right now its stock price is $100 per share. You think the stock price is gonna go up a lot in the next 3 months, so you buy a 3-month call on the maximum with a strike price of $120. For this right, you pay a $5 premium per share.

Scenario 1: Stock goes above strike price

Company X ends up doing real well and its stock price jumps to $150 during those 3 months. That $150 is now the maximum price. At the end of the 3 months, you exercise your right. Your payout per share is the difference between the $150 maximum price and the $120 strike price. So that’s $30 per share. But remember, you paid a $5 premium per share, so your profit is $25 per share.

Scenario 2: Stock stays below strike price

Now let’s say Company X has an okay 3 months, and its stock price goes up to $115 but never hits your $120 strike price. In this case, at the end of the 3 months, you wouldn’t exercise your right because you’d lose money. The call would expire worthless and you’d lose the $5 per share you paid for the premium.

The good and bad sides

Call on the maximum deals have their ups and downs. Let’s take a look at some of the good and not so good parts about them.

Potential for big profits

The best thing about calls on the maximum is that your profit potential is sky high. There’s no real limit to how high an asset’s price could go. And the higher it goes above your strike price, the more money you make. You could end up doubling, tripling, or doing even better than that on your original premium payment.

Not having to own the asset

Another big plus is that you don’t have to buy and own the underlying asset. Owning stuff outright can be complicated and costly. With a call on the maximum, you can get exposure to that asset’s price movements without the commitment and extra costs of buying it.

Losing money on the premium

The main downside is that you can lose the premium you paid. If the underlying asset’s price doesn’t go above your strike price, then your call expires worthless. That premium is gone and you don’t get it back.

Timing and volatility

You also gotta be good at timing and predicting market moves. The underlying asset’s price has to hit its high point before your call expires to maximize your profit. And if the asset’s price is real volatile, it can be stressful to watch and hard to predict.

Wrap up

So that’s the lowdown on call on the maximum deals. They let you pay a premium to make big profits if an underlying asset’s price increases. You pick a strike price and get paid on the difference between that price and the asset’s highest price. There’s no limit to your profit potential; you don’t have to own the asset. But you can lose your premium, and it can be stressful. You gotta weigh the good and the bad to see if it’s the right move for you.