The basic tools of options trading are call options and put options. People who are new to options trading are usually unfamiliar with these terms. When learning about options trading, someone may need to have call options explained.
Options are the right to buy or sell stocks. Call options deal specifically with the right to buy stock. Put options concern selling stocks. Both call and put options are often used in option trading strategies.
A call option can be bought or sold. An investor who buys a call option is buying the right to buy a stock at a given price by the expiry date of the option. The strike price is the price set by the terms of the call option. When someone buys a call option, they have the choice whether or not to use the option to buy the stock or let the option expire.
Someone who sells a call option is called the call seller or call writer. A call writer is selling the right to buy stock at the strike price. If a call writer sells the call option and the buyer chooses to exercise the call by the expiry, the writer must carry out the terms of the option and sell stock to the buyer at the strike price.
A call buyer makes money if the prices of the shares rise above the strike price of the option. When that happens, the call buyer can buy the stock or underlying asset for less than what it is worth. A beginning weekly options investor often starts with buying call options.
A person who buys a call option believes that the share price will rise above the strike price. A call writer makes money if the prices of the shares decrease or do not rise above the amount they received for the call option. If the call option expires without being exercised, the call writer keeps the call option premium as profit.
If someone sees believes that a company’s stock will rise about its current value and they want to invest, the person may decide to purchase the stock, purchase a call option for the stock, or both. If, for example, the current value of the stock is forty dollars, the investor might buy a call option with a strike price of $40 and expiry of a month for two dollars.
The price of an option is per share. Options are sold for one hundred shares, so an option with a price of two dollars sells for two hundred dollars. If the stocks rise, the investor may exercise the call option and buy the stock for forty dollars each and immediately sell the stock to make a profit.
In that example, if the stocks rise to fifty dollars at the time when the investor exercises the call option, the investor buys the stock and sells it to gross one thousand dollars. After subtracting the two hundred dollar cost of the call option, the investor made eight hundred dollars on that transaction.
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