When you buy a call option, you're buying the right to purchase shares of the underlying stock at a certain price - the strike price - up until a certain date - the expiration date. Call options are often used when you think the stock price will go up in the future. In this blog post, we'll explain how a call option works and provide some examples so that you can better understand this investment vehicle.
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Published on 17 January 2023
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What is a Call Option?
A Call Option is a type of derivative contract that gives its holder the right, but not the obligation, to purchase an underlying asset at a predetermined price. Call options are one of two main types of option contracts (the other being put options), and they offer investors the potential to benefit from any gains in the underlying asset's price without having to make any upfront investment or bear market risks.
At their core, call options give you the right to buy shares at a certain price for a certain period. They provide leverage and can significantly increase your profits if used correctly—you have significant upside with limited downside risk. Call options are most commonly used as part of an options trading strategy.
Long vs. Short Call Options
Call options give investors the right, but not the obligation, to buy a stock at a certain price (the strike price) before it reaches its expiration date. Call options come in two varieties — a long call option and a short call option.
A long call option gives an investor the right to buy security shares at the strike price until the expiration date. A long call is considered an "in-the-money" option if the current market price of the underlying security is trading above the strike price. Long calls are also referred to as bullish strategies because they provide unlimited upside potential with limited risk.
On the other hand, a short call option involves selling someone else's underlying security at the predetermined strike price before it expires. A short call is deemed an “out-of-the-money” option if the current market price of the underlying security is trading below the strike price. Short calls are also referred to as bearish strategies because they provide limited upside potential and unlimited downside risk.
Uses of Call Options
There are three main uses of Call Options
1. Using Calls for Speculation
Call Investors use options to speculate on the price movement of the underlying security. They can be bought and sold on exchanges, but brokers or financial advisors often control them. When Call Options are purchased, the investor can buy the underlying stock at a predetermined strike price up until the expiration date.
If the stock rises in value beyond that strike price, the investor will profit from their Call Option purchase. This is known as "being in the money". If the stock does not rise above that strike price before its expiration date, then that Call Option will expire worthlessly, and any money spent purchasing it will be lost.
2. Using Covered Calls for Income
A Call Option is a type of investment strategy that allows investors to generate income from their portfolio. Call options are contracts in which the buyer has the right but not the obligation to purchase an underlying asset at a predetermined strike price by a certain expiration date.
Call options may be part of a larger investment strategy. They can help investors increase their returns on stocks they already own or buy additional assets without putting up more capital. When utilized correctly, Call Options can enable investors to generate substantial income without taking on any additional risk.
3. Using Options for Tax Management
Call options are contracts that give investors the right, but not the obligation, to buy a particular asset at an agreed-upon price within a specific timeframe. Call options are derivative instruments and give investors the opportunity to leverage their invested capital for potential gains in a market environment.
Call options can be used as part of a tax management strategy by allowing investors to reduce taxes on stock profits or use losses from other investments as offsets against gains from call options.
The Bottom Line
Call options offer investors the right, but not the obligation, to buy a certain asset at a predetermined price and date. Call options are typically used to speculate on future stock prices or for hedging purposes. Before investing in call options, it is crucial to understand how they work and their risks, such as time decay and volatility. Call option traders should also be aware of any special incentives that come with their investments, such as dividends or early exercise privileges.
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A Call Option is an agreement between two parties, the buyer and the seller, to buy or sell an underlying asset at a specific price on or before a certain date. The buyer of the Call option has the right, but not the obligation, to purchase the underlying asset at an agreed upon price during a specified period.
A Call Option gives buyers of options the right to purchase an underlying asset (stocks, commodities, indexes) at a predetermined price before its expiration date. Call Options are used by investors to profit from upward price movements in the underlying asset.
Call Options should be bought when the investor believes that the underlying asset’s price will increase. Call options can provide a good return if the stock price rises before expiration since they allow investors to purchase stocks at lower prices than what they would have to pay in the open market.
Call options give the holder the right to purchase an asset on or before a certain expiration date for a specific price. Put options give holders the right to sell an asset at a specified price by a certain expiry date. The main difference between Call Options and Put Options is that Call Option owners have the right to purchase an underlying security, while Put Option owners have the right to sell one.
A Call Option is an agreement between two parties, the buyer and the seller, to buy or sell an underlying asset at a specific price on or before a certain date. The buyer of the Call option has the right, but not the obligation, to purchase the underlying asset at an agreed upon price during a specified period.
A Call Option gives buyers of options the right to purchase an underlying asset (stocks, commodities, indexes) at a predetermined price before its expiration date. Call Options are used by investors to profit from upward price movements in the underlying asset.
Call Options should be bought when the investor believes that the underlying asset’s price will increase. Call options can provide a good return if the stock price rises before expiration since they allow investors to purchase stocks at lower prices than what they would have to pay in the open market.
Call options give the holder the right to purchase an asset on or before a certain expiration date for a specific price. Put options give holders the right to sell an asset at a specified price by a certain expiry date. The main difference between Call Options and Put Options is that Call Option owners have the right to purchase an underlying security, while Put Option owners have the right to sell one.
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