Buying a leveraged stock option on margin.

[AbnormalReturns]

So I'm trying to understand margin/leverage/options a little bit more, I'm in a simulated options game on Investopedia. I want to leverage a stock option, I believe the stock will rise in price, so if I buy a call option, I am buying the right to buy that stock at the strike price? I'm also not exactly sure how margin works, the way I understand it is that it is just basically a loan and that you are responsible for however much money you have borrowed to leverage the trade. So let's say I believe the stock Raytheon(RTN) is going to rise in price from $154.79 to $170.00 over the next 6 months. How would I take advantage of this by using options and margin at the same time?

[Acdfriq]

A covered call....for every 100 shares you buy sell 1 out of the money call against it that expires somewhere close to 45 days. Roll the calls to the next expiration when they get to 7-11 days to expiration....you can roll the strike prices up or down as needed as long as you aren't doing it for a debit.

[5rJHpj7i27]

The current Implied Volatility is suggesting that there is only about a 15% chance of RTN trading above 170 in the next 6 months. So your target is about 15$ per share over the next 1/2 year with a probability of 85% that it isn't going to happen. However if you sell an Out of the Money call against each 100 shares (in a margined account your Buying Power Reduction will be reduced by much less than the actual price of the position. So with $100k you might be able to hold over $200k of stock.)

[AdamHunley]

At around 45 days to expiration you would might be able to collect around 2$+ per share over the next 6mos and if you roll the short calls a week before expiration that would give you 4-5 rolls. Then your probability of making 15$ per share looks more like a 50/50 shot...as opposed to a 85/15 loser. Also, as you continually reduce your cost basis your probability of not losing any money starts to look more like around 90/10 winner.

[1SNl47gxHs]

Another way to think about it.....if your are leveraged, even if only 2/1, and if you can collect 2$ in premium for every 150$ worth of stock which is 1.3% per month....but your capital requirements are only 1/2 then you are making 2.6% per month on capital used. The strategy isn't risk free...but it continually improves your probability of success well beyond the 50/50 shot of simply being long stock.