What is an Option?
Options are tradable contracts that allow investors to make predictions about whether the price of an asset will increase or decrease at a specific point in the future without actually purchasing the assets in question.
What are Call Options?
A Call Option is a right given to the holders of the financial security to buy the asset on or before the contract expiration date of maturity.
Add on terminologies:
Strike price: The specified price is called the Strike price, and the specified period is the maturity period or expiration.
Premium: A fee is to be paid to get the option rights. This amount is the premium.
Profit and Loss: The profits could be unlimited in Call options. In case of losses, the maximum amount an individual can lose is the premium amount that is paid.
Types of Call Options:
Call Options are basically of two types Long Call Options and Short Call Options. Let’s discuss them one by one:
- Long Call Options:
A Long Call Option is simply a right given to investors to buy the specified asset at the strike price in the future. It doesn’t impose any obligation on the buyer.
It gives a great opportunity to the buyer to plan well to make a chea[er purchase of assets in the future.
- Short Call options:
A Short Call Option gives rights to the seller to sell their holdings at the strike price at a specified time on or before the expiration date.
The seller gets the benefit of reducing the losses they may suffer in prices due to the change in market fluctuations.
When to buy and sell the Call Option?
In the Stock Market, time is one of the most important aspects. The timings of your buying and selling of Call options matter the most.
The right investor is the one who buys when the prices are low and sells when the prices are high.
When you have paid a premium to access the Option rights, you can speculate freely. Because in that circumstance even if you lose, you can lose the maximum of only the premium amount paid.
How Do Call Options Work?
The holder of a call option, a type of derivative contract, is given the right but not the obligation to buy a certain number of shares at a predetermined price, or the “strike price” of the option.
To lock in a profit, the option holder can exercise their option by purchasing at the strike price and selling at the higher market price if the stock’s market price climbs over the option’s strike price.
However, options are only valid for a short while. The options expire worthless if during that time the market price does not climb over the strike price.
Why Invest in Call Options?
If investors have positive expectations about the future of the underlying shares, they may think about purchasing call options.
Call options may offer these investors a great chance to speculate on the prices and earn higher profits.
Purchasing shares indirectly through call options can be a captivating approach to boost an investor’s purchasing power if they are confident in the share price of a company.