Options are contracts that are used to buy and sell financial products that act as an underlying asset. Moreover, a call option is a financial contract between buyers and sellers. This contract gives the holder the right to purchase stocks at a set strike price. This process occurs during a specified timeframe based on the expiration date of the option.
How Do Call Options Work?
A call option gives the buyer the option to buy underlying assets and lock in a specified price. When the underlying asset price increases the buyer will gain additional profit. With a call option, the buyer will pay a premium, which the seller will be able to receive.
Basics of Call Options
Call options grant stockholders the ability to buy at a set strike price up until its expiration date. If a company’s stock continues to rise then the price of the option contract will also go up. However, when the underlying asset is below the strike price and reaches the expiration date, then the buyer will lose the premium paid.
What Are Call Options in Simple Terms?
Call options are financial contracts that are between a buyer and seller to exchange securities at a specified price. You would only buy a call option if you believe the security will rise in value before the expiration date.
Example of a Call Option
A single call option contract may give a holder the right to buy 100 shares of Microsoft stock. This stock could be bought at $550 up until its expiration date in three months.
How Does the Strike Price Affect a Call Option?
A strike price is the set price where the owner can buy or sell the underlying commodity. Call options are purchased with a fixed strike price, which will never change.
The intrinsic value of a call option is the difference between the underlying stock price and the strike price, which is used to determine the value of the option. If the intrinsic value between the two options is negative then the value would equal zero.
When Are Call Options Out-The-Money?
Call options that are out-the-money have no intrinsic value. With these options, the strike price is higher than the market price of the underlying asset. This means the holder has the right to purchase the stock at a higher price than the current underlying price. Moreover, this is contributed to the option having no intrinsic value.
When the stock price is above the strike price this will cause the call option to continue to grow in value quickly. Meaning, the underlying stock must rise in price in order for it to generate a profit.
When Are Call Options In-The-Money?
When call options are in-the-money this indicates that the option holder can buy the security at a price that is less than the current market price. The option holder can also sell the security above its current market price. Additionally, it should be noted that in-the-money call options have higher premiums than any other options.
When to Sell a Call Option
Selling options is a great way to earn a consistent income. There are many risks and obligations you need to be aware of before you sell a call option. If an investor believes that the outlook of a call option is looking very bleak then he or she should sell it right away.
What Is a Call Spread?
A call-option spread is created when there is an equal number of call options being bought and sold all at the same time. A call-option spread is more affordable to implement, and it can be used to profit from a variety of different vertical call spreads on the stock market.
Know the Right Time to Exercise a Call Option
You should exercise a call option when the underlying stock price is above the strike price of the option. Additionally, you should exercise a call option when the underlying stock price rises above the exercise price. This is because it will allow you to purchase shares at a lower price which, in turn, will lead to generating a net profit.
Benefits of Call Options
People often worry if call options are even worth it because they are worried about the risks associated with investing in the stock market. Call options can serve as powerful tools for investors that understand how to take advantage of the many benefits of call options.
If you own a stock that has appreciated you can write a call option that is equal to the market price and collect a premium through a covered call. You will sell the shares and gain income from the stock along with a premium.
Increased Cost Efficiency
Premiums for call options are less expensive than equal underlying securities, so this leverage can allow you to increase your return from your investment by selling for a net profit. Call options can serve as cost-efficient investments if you make smart financial decisions.
Financial Advisors Can Help You Invest In Call Options
A call option is a financial contract between buyers and sellers, that gives the holder the right to purchase stocks at a set strike price. This process occurs during a specified timeframe based on the expiration date of the option. If a company’s stock continues to rise then the price of the option contract will also increase.
Financial advisors can help evaluate your investment objectives and teach you how to buy and sell call options. Working with a financial advisor that can help you trade options can be so beneficial. They can help you understand how call options work and how you can effectively trade them. You should consult a financial advisor to help you invest in call options today!