If you are in search of superior returns for your investments in risky assets with limited downside risk, then learning how to trade a call option in your portfolio may be just what you need.
Call options have been around since 1973 and have been used by some of history’s most famous investors, including Warren Buffett and George Soros. The following section will explain how they work and why they can be so profitable if used correctly.
An Overview of Call Options
A call option is a type of options contract giving its owner (holder) right, but not obligation, to buy an underlying asset at a specific price (strike price) on or before a certain date (expiration date). Call options to go up in value when the market goes up and go down in value when the market goes down.
Buying call options
This strategy can work well if you’re right about your forecast for the stock’s future performance. If you think a store will go up in value, then buying a call option would be the way to go. If you believe this option and sell it later, then you will have made money.
Selling call options
The selling call option is a strategy that involves selling put options at a price above the market price of the underlying asset. An investor who sells a call option will make money if the stock rises, regardless of whether the investor owns the underlying asset. The seller receives Rs.x for each share of stock sold, where x is the premium paid for the option.
Call and Put Options Uses
Both options have many uses, but the two most common are as follows:
To speculate on a change in market prices by buying and selling contracts based on their option values.
To create a hedge against a possible decline in the value of an underlying asset.
Here’s more about the call and put option:
When the option is bought, it will be treated as an extended position, and if the stock price moves in favor of the trader, he can make money.
If you sell an option, then you are treating it as a short position. So, if the stock goes up, you can make money by selling the option.
You should consider many other factors before buying or selling call and put options. These include:
Expiring Strike Price,
and Expiration Date etc.
What Happens When A Call Option Hits The Strike Price?
The strike price is the pre-determined price at which you can exercise an option. When a call option hits its strike price, the option holder has the right to buy 100 shares of stock at that pre-determined price. The cash received upon exercising a vote is called “the premium.” The premium is paid for by buying a call option and selling an equivalent number of shares of stock.
Call options trading comes with lots of risks but also great opportunities. On the one hand, if you invest in cheap calls, your potential return on investment will be high. On the other hand, if you invest in expensive ones, your losses will be more significant than buying shares directly.