Posted on 24 July 2012. Tags: call option
The call option is a piece of the options that are created with commodities contracts; these options are only applicable to commodities trading and provide additional tools for an investor to make profits. The definition of a call is simple: The holder has the right to buy the asset at the specified price during a specified time period. A put option is basically the opposite: The holder can sell the underlying asset at the specified price during the specified time frame.
At first glance a call option seems to give all the advantage to the person who has the right and takes away all the advantage from the seller; the difference is that it costs money to buy that particular call option. There are three major elements to a call option: The underlying asset, the amount, and price; these detail how many of what item the investor can buy at what price. If the item’s value rises above the price, then the investor can exercise his or her call option and buy the amount specified in the contract. The investor can then turnaround and sell the commodity for a profit.
The risk comes in when the commodity does not ever rise above the strike price; this will cause the investor to never exercise the call option and the investor is then out the commission fees and the original cost of the call option. An option to call can be a great way to obtain a sort of safety net in a commodity that an investor expects to rise in price. The futures commodity market is an interesting place where there is a great deal of options not normally available with other stocks and bonds. A call option is just one option; there are also put options that are basically the opposite of a call.
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