All About Calls

All About Calls

All About Call Options

 

Call Options is a term used famously in finance and in the trading world but some of you might not know what it exactly is.

 

If you are someone who wants to benefit from options trades, considering call options might be a good choice.

Introduction

 

Call options can be called an agreement that give the buyer the right (without obligation) to buy a bond, stock or commodity or any other instrument for that matter, at a given price in a given time period. The bond or whatever the option the buyer buys will be called the underlying asset.

 

The working mechanism of the call option is simple because once the option has been brought at a specific price, it will be sold later for a higher price and this is the difference in which the buyer will make the profit.

 

These options are popular because they allow the buyer or holder to buy 100 shares of a given underlying stock at a given price. This is called the ‘strike price’, at which he buys the option, and he can choose to buy it till a specific time period. This will be called or referred to its ‘expiration date’.

 

To explain this further, we look at an example, where a single call option contract might give the buyer the right to purchase 100 different shares of say, Facebook stock, at $200 until they expire after three months. Once Facebook shares go up (as in their price increases), the price of the options contract will also increase and vice versa. The person who purchased the call option will have the freedom to hold the contract till it expires, in our case, till three months. If they wait for it till its expiry, then they will have the freedom of taking a delivery of these stocks or even sell these stocks at any point prior to the expiration date at the current market price of the contract. The benefit here for the options contract holder is that they can wait just before the expiry and see how much the options rise so that they can sell it at a higher price. OR, they can simply get the delivery after its expiry and then choose to do whatever they want with its sale.

 

The market price of the option is referred to as its “premium”. It is the price that the user pays for the rights that the call options render. If on its expiry, the asset in question is below its strike price, the buyer will lose the premium paid and this is called the ‘maximum loss’.

 

Purpose

 

There are three main purposes of call options. They are either used for tax management, for income generation or speculation. For buyers like you, and me the last two make sense but all three are the top reasons why people buy call options in the first place.

 

When it comes to tax management, investors try to go for call options because they let them change their portfolios without changing their underlying security. You can effectively manage your taxes with their help because your money goes in different places and that is what strikes the most to someone who wants to effectively manage their taxes.

 

The same is true in the case where these options are used for income generation. There are some investors who go for call options because they generate steady income. It is a good choice because there is less risk involved and less paper work too. The process is simple because you can get such a call option and sells it at a higher price before its expiry to make much more than you invested in. If the price of the underlying asset in question strikes above, it is all good news for the investors because he will make a good profit on them.

 

Some people also go out of their way to use call options for speculation. The world of trades is very risky and people want all kinds of things to protect them in adverse times. When it comes to options, their contracts give the buyers the chance to get significant exposure to a certain stock for a comparatively smaller price. They can also provide higher gains if the price of the stock increases but they can also lead to a maximum, 100% loss of premium in case the call option expires at a low price or worthless. However, their benefit and the benefit of buying them remains that their risk is capped at the premium that is paid for the option in question.

Call Buying Options

 

For someone who is interested in buying a call option, the best way to go about is ‘call buying’. This is the simplest and easiest way to trade options. You can start off your trading options by buying calls because it is quite simple to do so and there is a high chance of a bigger ROI once the trades a successful.

Selling Call Options

 

The other thing in question is the topic of selling call options. Just as you buy them, you will also have to sell them to make a profit on them. Therefore, rather than purchasing these options, you write them or sell them off for a certain profit. The people who sell call options are called both sellers and writers. They sell the call options with a chance and hope that they expire worthless so they pick premiums. Selling the calls is a bit risky but also very profitable if they are done the right way.

 

Call options are a great way of minimizing risk, expanding your portfolio and dealing with something that is not that risky or volatile. They give you the chance of having a lot under your own control, unlike other trading options, and they let you explore at minimum risk. Call options offer a range of benefits, if you are careful about how you go about trading them. They also give you additional time (time until expiry) to make your trades well thought and sought.