An example of a Call Option

In my last blog I spoke about the option trading strategy of buying a call and now I want to suggest a way for you to actually do something about it. The investment I am considering is American Oriental Bioengineering (AOB). It will cost about $220 per 100 share contract and will not expire for two years. You can invest about $140 for a one year expiration date. In short, you buy a $5 call on AOB which will cost you $220 or $140 to control 100 shares of stock. If the company goes to 10, in the 2 year (1 year) period the option will be worth $1000. If it goes to 20, $2000 etc. You could double that if you controlled 200 shares or $440 ($180) to double your gain (but of course doubling your risk),

Why do I think this is a good investiment? 1) The market is low now and it looks like a good entry point; 2) The company is in China which is the world's fastest growing economy; 3) It is a pharmaceutical company that produces Chinese herbal medicines that have been used for a 1000 years and more; 4) MSN Money rates it a 7 (http://moneycentral.msn.com/detail/stock_quote?Symbol=aob&getquote=Get+Quote); 5) The Motley Fool listed it as a 5 star stock. http://msn.fool.com/investing/general/2009/01/22/5-star-stocks-on-the-upswing.aspx?logvisit=y&source=eedmsnlnk0010001&published=2009-01-22

Downside? Quality control issues. If a Chinese company can sell contaminated products, so could this company. The economy could not recover for 3 years.