A call option is a specific type of option trade. While you’re reading about options trading, the first two terms you learn are often call and put. If you hope that underlying asset prices are likely to increase, you would purchase a call option. If you anticipate that underlying asset prices are going to fall, you are going to invest in a put option. Put and call are just like the yin and yang of options investing.
A number of options traders start their trading profession in this type of investment by buying call options. A call option gives you the right, but not the obligation, to sell or purchase an underlying futures contract or stock at a future date for a stated price. When you have the right to buy, you would “go long”. However when you have an obligation to sell, you would “go short”.
If a call option is exercised, the seller of the option must give up control of the stock or futures contract. The seller gets control of the underlying asset back if the call option is allowed to expire. So you can view that a call option is a real contract between a buyer and seller and you can find specific terms in the contract.
“Right” and “obligation” are two main keywords that defines a call option. The call option gives you a right to exercise the option, but you are not obliged to do this. On the other hand, the seller has an obligation to sell you the underlying asset if you choose to exercise your right.
Goal of Buying a Call Option
When a trader buy a call option, the main aim is to earn money on increasing asset market prices. The buyer expects the price of the asset will rise in the future. The call option enables the buyer to purchase the asset below market price. If the market price does not exceed the strike price, then the option can just expire. In such case, the buyer loses only the premium and the transactions costs.
Beginner investors pick call options in the beginning since the upside profit potential is almost unrestricted. Of course, the strike price and the timing of the contract will decide if the call option buyer is successful.
It is normal that option seller wishes that the option stays out of the money. If so the seller gets to keep the underlying asset plus the premium and fees paid by the seller.
You can purchase call options for stocks, bonds, agricultural commodities, precious metals, interest rates and many others. Once the call option is in place, the seller are not allowed to sell the underlying asset included in the option terms to anybody.
Watching the Market
Investors learning how to complete profitable call option transactions can observe the market for a period of time and witness how the big investors do the job. When the market shows large volumes of call options during the day for a certain asset then you can probably assume the investors expect the price to increase in the near future. The charts show expiration dates meaning you can even determine how quickly the investors expect the prices to increase.
Call options typically play a role in options strategies. For example, call options are utilized in long and short straddles. A straddle is a spread options strategy which balances a call option and a put option. It helps to minimize risk of loss while maximizing speculation.