Call-Buying Strategy
People who use the call-buying approach buy call options. For the option premium, they get the right to buy shares of an underlying asset at a certain price, called the strike price, on or before a certain date. Investors who think the underlying stock or security will go up in value usually use this approach. When investors buy calls, they may gain possible leverage, which lets them control a bigger position with a smaller initial investment. If the price of the underlying asset goes up above the strike price before or on the expiration date, the owner can buy shares at a price lower than what they are worth on the market right now. This makes the call option profitable. It’s important to keep in mind, though, that if the stock price doesn’t hit the strike price by the expiration date, the call option may become worthless, and the premium paid will be lost. As a speculative strategy, call-buying tries to make money when prices go up while limiting the original financial commitment.
What is Call Option & How it Works?
Financial contracts known as call options grant the buyer the right, but not the obligation, to purchase a stock, bond, commodity, or other asset or security at a given price within a predetermined window of time. If the buyer exercises the call, the call seller is required to sell the asset. When the price of the underlying asset rises, the call buyer benefits. There are several reasons why share prices might rise, including good company news and acquisitions. Since the buyer usually does not execute the option, the seller benefits from the premium if the price falls below the strike price at expiration. One way to compare a call option with a put option is that the former allows the holder to sell the asset at a predetermined price to the buyer on or before the option’s expiration, while the latter does the opposite.
Geeky Takeaways:
- A call is an option contract that grants its owner the right, but not the obligation, to purchase the related securities within a specific period and at a given price.
- Its expiration, also known as the time to maturity, is the stated period during which the sale may be made. The specified price is known as the strike price.
- The premium, which is the maximum amount you can lose on a call option, is the cost you pay to purchase the option.
- Call options can be bought for trading purposes or sold to manage taxes or income.
- In spread or combination strategies, call options can also be combined.
Table of Content
- How do Call Options Work?
- What is the Expiration of Call Options?
- What Happens after Expiration?
- Difference Between Long Call Options and Short Call Options
- How to Buy a Call Option?
- How to Sell a Call Option?
- How to Calculate Call Option Payoffs?
- When Should You Buy or Sell a Call Option?
- Call-Buying Strategy
- Call Option Examples
- Difference Between Call Option and Put Option
- Frequently Asked Questions (FAQs)