Call options in stock options trading are the type of option that increases in value when the stocks rise. They are said to be the best type of option as they allow the owner to buy the option stock at a specific price by a pre-determined date and they can appreciate quickly with a minor upward fluctuation in the stock price.
Call Option
Generally, the call option gives the holder a right, but not an obligation, to buy the stock at a given price (known as the strike price) by a specific date before the option expires. To have this right, the call buyer will have to pay an extra sum of money called the premium, which goes to the seller. This is different from stock trading as options contracts must be exercised before the expiration date or they become worthless, as compared to stocks that have an indefinite life on the market. Each contract represents 100 shares of the specific stock. Investors don’t have to own the stock to buy or sell a call.
How Call Option Works
Call options are profitable when stock prices are above the strike price at the expiration date. The call owner can choose to exercise their option by purchasing the stock at the current strike price or selling it at its current market value to another buyer. The option holder will only profit if the premium is less than the difference between the strike price and stock price. For example, Mr. A buys a call for $1 with a strike price of $20 while the stock price was $25. Then the option is worth $5 and the trader has made a profit of $4. However, if the price is below the strike price at expiration date, then the call is not profitable and will expire worthlessly. If the stock stays at the strike price or starts to decline, the call option may not get exercised, which means the call seller will keep any premiums received for the option.
Benefit of Call
The biggest advantage of buying call options for investors is that it highlights the gains in the stock prices. Buy paying a premium which is a relatively lower cost than other stock options; you can enjoy the gains in the stock price until the expiration date. So when investors usually buy a call, they are expecting the stock prices to rise before expiration.
Manipulating the Call
When selling call options, the sellers also known as writers, have an obligation to sell the stock at the strike price. The seller must have one of the three things: the stock itself, enough cash to buy the stock with, or the capacity to deliver the stock to the buyer. Call sellers are usually expecting the stock prices to remain flat or steadily declining.
Call options are popular with investors because they can allow investors to adopt many different strategies. Generally, options are seen as risky, but investors can use them to hedge their risks for a secure financial position. By limiting risk-taking, investors can stand to generate a capital gain with fewer potential losses. Another way of generating income would be through premiums. Investors could sell call options to generate income and would be a safe strategy in a flat or slightly declining market where stocks are not likely to be called. Many of these positions are taken in our stock options signal advisory service: https://stockkingoption.com.
Some investors may use call options to get better selling prices for their stocks. They can sell calls on the stock that has a cheaper current price to effectively divest the stock that is too cheap at the current price. If the price keeps rising above the strike price, they can sell the stock and take the premium as a bonus. If the stock keeps being below the strike price, they get to keep their premium and are free to try the strategy again later.
