Stock Options Explained: Call Options

Most of the new options trader in the market now wants various aspects of stock options explained to them in detail. Options trading is now getting more popular as a low-risk high-gain mode of investing. Most newcomers in the market at first get confused about all the terms and how they can actually make profit from it. So, they need it explained to them part by part to understand the whole idea. Here one type of option trading, call option is discussed.

For some background knowledge, options are contracts that give the buyer the right to buy some stocks at a specified price called strike price before a specified time called expiration time. It gives the options buyer only right, not obligation to buy or sell the stocks, and gives the options seller, otherwise known as options writer the obligation to buy or sell the stocks as specified in the contract. Also, every optionhas a premium or price per single stock and usually comes as a bundle of 100 stocks.

Stock options have two types. One is call option and another is put option. Call options give the buyer the right to buy the stocks and the put option gives the buyer the right to sell the stocks. So, as we are getting call typestock options explained, put options can be put aside for now.

Buying call options is very simple, and popular to new traders. It is less complicated to exercise and has high rate of income. The buyers buy call options hoping that the price of the stock will increase and they will profit from the increased price.An example can get call typestock options explainedmore easily. Suppose, the current market price of a single stock of XYZ company is 20$. If someone buys a call option of those stocks having strike price of 20$ at a cost of 1$ each, he will be spending total 100$ as the price of the option for 100 stocks. After some time, if the price of each stock goes up to 30$, the buyer will have a neat profit of 900$. The profit here is made in this way, he exercises the option and buys the 100 stocks at total 2000$, sells them at 3000$.And his profit is found by subtracting the price of the options from the difference in the buying and selling prices of the stock.

Selling or writing call options are also common. Although they are much riskier, they can yield much profit if done properly. In this case, the writer of the option sells the option hoping that the price of the stock would not increase and the option would become worthless to the buyer at the end.Thus the seller would pocket the whole price of the option at cost of nothing. Options writing can be done in two modes. Covered calls which involves writing call options for stocks already owned by the writer, and Naked Calls or Uncovered Calls which involves writing call options for stocks not currently owned by the writer. Writing uncovered calls is very risky and is advised not to be done by newcomers.

There is another point which should be mentioned while getting call type stock options explained.It is call options spread which involves buying and selling equal numbers of call options for same stocks at different strike prices. It reduces the risks but limits the window of maximum gain.

Share and Enjoy:
  • Print
  • Digg
  • Sphinn
  • del.icio.us
  • Facebook
  • Mixx
  • Google Bookmarks
  • Blogplay

Tags: , ,

Leave a Reply