Call Option is an agreement between buyer and seller that allows the buyer to purchase the agreed upon stock at a certain price. If buyer thinks, stock is going to rise in the near future; he may purchase a call option.
Risks are inherent in call option agreements or contracts. Both buyer as well as holder faces the similar uncertainty. If the option turns out to be non-profitable, all the money paid for the agreement will be lost. The money paid for the agreement is known as premium. The premium has direct link with the market rate of the underlying stock. Any change in the market is reflected in the premium. In case market moves on the higher side, premium also rises, which will result in the profit to the investor. Investor can trade the option at the market for profit or he can purchase the stock at the agreed upon price.
Investors, who deal in options, have two options. One, they can trade the options for premium. Second option is that, they can exercise option call by purchasing the shares at the agreed upon price.
Risk
Options come with inherent risk. Standard options come with monthly expirations that will be valid at the maximum for 9 months. If an investor has a call option, which will expire after 2 months from the month of purchase, then investor has only 2 months to close the option. In case option stays open till the expiry date, it will be rendered useless.
Likely Profit
Profit potential in case of a call option is unlimited, because it is linked to the increase in the underlying stock market. Price agreed upon in the option is known as strike price. Let us suppose market gains 20 points over the strike price. Then profit of the investor stands at 20 points minus the premium. There are no limits to the profit.
Call Option as Protection
Call options can act as protection or safety measure for existing positions. In case market moves up buyer will be happy to make a transaction at the strike rate, which will be lower. Seller would like to minimize his loses, for that he may exercise, short call option or covered call option.
Short Call Options
It is the strategy that allows the players to close the option and as a result he collects the premium. In case option is not covered means underlying stock belongs to you, then you are open to unlimited loss.
Covered Calls
Covered calls provide the safer alternative to short call option. If a person owns shares at the same price at which he would like to exercise short call option, this will allow the investor to make profit and lowering his cost. More over if option comes into play investor can make the transaction from his shares and avoid loss.
Option investment is for only advanced investors. Take professional help to find out your suitability for this type of trade. Though profits are huge, the game is risky.
Tags: cover call options, likely profit, Short Call Options, uncovered call options
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