Call Option Examples
Buying a Call Option |
Selling a Call Option |
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Stock XYZ has a current trading price of $50 per share. You predict a price increase for the stock within the coming months. 1. Research and Analysis: You hold the belief that XYZ’s stock is set for a potential increase, with a price point of $60. 2. Opt for a Call Option: Choose a call option that possesses the following characteristics: a strike price of $55, an expiration date spanning three months, and a strike price of $55. 3. Order Placement: Execute a “buy to open” order for a single call option contract at the prevailing market premium of $3 per share (equivalent to $300 in total cost, given that a single contract typically encompasses 100 shares). 4. Monitoring: Observe the performance of the stock over the course of the upcoming months. A profitable call option is generated when XYZ’s stock price surpasses $55. 5. Result: In the event that the stock price reaches $60, for example, one can profit by exercising the call option and purchasing the shares at the strike price of $55 before selling them at the market price. |
In the given scenario, the investor presently possesses 100 shares of Stock ABC, each of which is valued at $75. You are interested in augmenting the income you receive from your current stock holdings. 1. Call Option Identification: Select a call option that possesses the following characteristics: a strike price of $80 and an expiration date of one month. 2. Order Placement: Execute a “sell to open” order for a single call option contract at the prevailing market premium, which assumes a value of $2 per share (equivalent to a total income of $200). 3. Monitoring: Observe the performance of the stock over the course of the following month. The option expires void if the stock price remains below $80; you retain the premium. 4. The buyer may exercise the option if the stock price increases above $80; in that case, you would be required to sell your shares at the strike price that was previously agreed upon. Although the premium remains yours, any potential profit you may earn is restricted to the strike price. |
These examples show two different ways to look at call options: buying with the goal of making money from price increases, and selling (covered call) to make money while limiting possible gains. Before you trade options, you should always carefully consider the risks and the state of the market.
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)