I just purchased my first option - 10 contracts of "EXC January 2012 $50 Calls at $2.10." In other words, anytime between now and January 2012 I have the right to buy shares in Exelon for $50. Each contract includes 100 shares, and I bought 10 contracts, so my sunk cost in this investment was $2,100 (plus a small commission of ~$11).
Since the contract price was $2.10, I make a profit if the share price exceeds $52.10 (50+2.10). Due to the leveraged nature of LEAPS, for each incremental $1 above this price I make a $1,000 profit! My hope is the economy continues to rebound and both power prices and energy consumption rise along with it. If this happens my guess is EXC could be worth $60 to $80 a share, which would generate a profit of $7,900 to $27,900, respectively - not bad for a $2,100 investment.
On the other hand, there is a decent chance my investment thesis could be flat-out wrong. If this is the case and EXC never gets above the $52.10 threshold then I only stand to lose $2,100.
