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Understand the Power of the Call Option


Call Option is Rights and Privileges

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.

Making Sense of the Call Option

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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Trading Call Options


Trading Call Options – What Is A Call Option?

Trading Call OptionsTrading call options is a powerful trading tool that any stock market trader or investor should consider to give them an advantage when trying to profit in the stock market.  Trading call options is not as simple as buying and selling stocks because making money holding a call option requires the underlying stock that the call option is based upon to go above a specified price (strike price) before the option expiration date.

An Option is a financial product that is comprised of a contract to buy or sell a specific amount of the option’s underlying instrument (which is a stock or commodity) at a specified price on a future date.

An Option contract to buy a specific amount of the option’s underlying instrument at a specified price on a future date is known as a Call Option.

Trading Call Options – Call Option Trading Strategies

There are a number of trading strategies associated with trading call options.  Since call options have an expiration date, timing is very important when considering the use of call options in a trading strategy.  Stock market traders and investors use call options in their trading and investment strategies for a variety of reasons, including:  speculating that a stock is going to make a move higher, purchasing a long position in a stock via options at a fraction of the price of actually purchasing the stock, and to protect the downside risk of buying a stock, if the trade does not work out and the stock falls in price.

A trader or investor buys a call option to profit from an anticipated move higher in the price of the underlying stock that the call option is based upon.  If the stock that a call option is based upon reaches the call option’s target price (strike price) and rises to a level above the target price that is high enough to cover the premium (fee) that is paid to purchase the option, then the call option trade is profitable.  The higher the underlying stock moves above the target price for the option before the expiration date, the higher the profit is for the buyer of the call option.  One of the advantages of using call options to play an anticipated move higher in a stock is that if the underlying stock moves significantly higher, the call option could increase by a much higher percentage than the actual percentage move in the underlying stock.

Traders and investors also buy call options in lieu of buying shares of a stock because call options can be purchased for just a fraction of the cost of buying shares of a stock.  This allows traders and investors to commit a much smaller amount of money to play a stock’s anticipated price movement higher versus actually buying the stock, which frees up their trading and investing capital for other purposes.

Call options are popular with some traders and investors because they protect the downside risk of playing an anticipated move in a stock’s price.  If the stock does not move higher as anticipated, and instead moves lower, the loss associated with buying a call option is limited to the premium that is paid to buy the call options on the underlying stock.  Whereas, the loss associated with buying a stock can be substantial if the stock makes a significant unanticipated move lower in price.

Those who wish to start trading call options and using call options as part of their investing and trading strategies are encouraged to learn as much as possible about the options market and the various ways call options can be traded.

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Option Trading Basics


Option Trading Basics – Option Definitions

Option Trading BasicsBefore using options as a tool for investing in the stock market, it is vitally important to first understand option trading basics, such as:  what is an option?, what kinds of options can be traded?, how are options traded?  Understanding option trading basics will help an investor make sound investment decisions when utilizing options as part of a trading or investing strategy.

An Option is a financial product that is comprised of a contract to buy or sell a specific amount of the option’s underlying instrument (which is a stock or commodity) at a specified price on a future date.

An Option contract to buy a specific amount of the option’s underlying instrument at a specified price on a future date is known as a Call Option.

An Option contract to sell a specific amount of the option’s underlying instrument at a specified price on a future date is known as a Put Option.

Option Trading Basics – How Options Are Used By Investors

An understanding of option trading basics is not complete without an understanding of how investors use options in their investment and trading strategies.  Investors use options for a variety of reasons, including:  speculating that a stock is going to make a move higher or lower, locking in their gains on a stock that they hold that has made a significant move higher, and collecting a premium on a block of stock that they own.

Many investors use options to speculate on price moves in stocks.  An investor would buy a call option to profit from an anticipated move higher in the price of a stock.  The higher the move above the target price (strike price) for the option before the expiration date, the higher the profit is for the buyer of the call option.  The opposite formula is used for put options.  An investor would buy a put option to profit from an anticipated move lower in the price of a stock.

Investors also use options to lock in or insure in their gains in a stock by buying put options in sufficient amounts to cover their stock holdings near the current trading price of a stock.  If the stock falls in price, then they can still sell their holdings in the stock at the put option’s target price, thus locking in their profit at a specific price regardless of what happens to the stock.

A stockholder who owns a stock that wants to make some money off of their stock holdings without actually selling the stock can sell a put option and collect a premium from the buyer of the put option.  Selling a put option can be risky, since the seller of the put option is relying on the stock to stay above the target price when the option expires.  If the stock falls below the target price when the option expires, the seller of the put option may be forced to buy the underlying shares at the target price and provide them to the buyer of the put option, thus incurring a loss rather than making a profit from the premium that they collected for selling the put.

Options are also used in lieu of buying and selling actual shares in a stock because options are often much cheaper than the cost of actually buying shares of a stock, and therefore a trader or investor only has to commit a small amount of money to play a stock’s anticipated price movement.

Options are popular with some traders and investors because they protect a trader’s downside risk of playing an anticipated move in a stock’s price.  If the stock does not move as anticipated, the loss associated with buying an option is limited to the premium (fee) that they paid to buy the option.  Whereas, the loss associated with going long or short a stock can be substantial if the stock makes a significant unanticipated price move.

Those who wish to trade options are encouraged to go beyond option trading basics by learning as much as possible about the options market, which can be a very useful trading and investing tool.

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