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Stock Market Trading:
Buying Call Options
By buying call options you have the right, but not the obligation,
to purchase an underlying security. The options can be available in various
strike and expiration dates can vary from one month out to more than a year.
The one who is buying calls believes that the market will rise. If you buy
a call option, your maximum risk is the money paid for the option. The maximum
profit depends on the rise in the price of the underlying security.
As the price rises, the long call becomes
more valuable because it gives you the right to buy at the lower strike
price. That's why traders choose to buy a call option in a rising or bull
market.
When you have call you have three options to exit
the trade:
- You can let the call expire and lose the premium.
- You can exercise the call to receive the stock at the
strike price of the option and by selling the stock at the current market
price collect the difference.
- You can sell the call. In this case you can make money
if the price of the premium rises in value due to a rise in the underlying
stock.
Example:
A stock trades at $40, you might buy
a call option with a strike price of $44 for three month at a price $1.
- If the stock goes to 50 in the next three month you can
exercise your call option and demand that the call seller sell you stock
for $44. You can sell the stock for a market price $50 and keep the difference
$6 (600 percent).
- On the other hand if the stock declines to $35 it doesn't
make sense to exercise option and buy stock for $44. Your options would
expire worthless and you would be out of $1. in this case the seller of
the call would make $1
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