What is an Option? An option is a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties.
For most casual investors, that definition may as well be written in ancient Greek. When buying a call option Options and Call Options Perhaps we can explain options a bit more clearly.
Call Option Definition: A call option is an option contract in which the holder buyer has the right but not the obligation to buy a specified quantity of a security at a specified price strike price within a fixed period of time until its expiration.
Then you can either keep the shares which you obtained at a bargain price or sell them for a profit. But what happens if the price of the stock goes down, rather than up?
You let the call option expire and your loss is limited to the cost of the premium. When you hold put options, you want the when buying a call option price to drop below the strike price. If it does, the seller of the put will have to buy shares from you at the strike price, which will be higher than the market price.
Because you can force the seller of the option to buy your shares at a when buying a call option above market value, the put option is like an insurance policy against your shares losing too much value.
Purchasing options can give you a hedge against losses, and in that sense, they can be used conservatively. But there are many options strategies that amount to little more than gambling and can increase your risk to a frightening degree.
Remember, when a call is exercised, stock must be delivered by the seller of the call.
If a strong market advance or a major announcement by the issuer has driven the share price up sharply, your losses could be enormous. As indicated, many option strategies involve great complexity and risk.
For this reason, not all options strategies will be suitable for all investors.
To get to a point where your loss is zero breakeven the price of the option should increase to cover the strike price in addition to premium already paid.
In fact, with the exception of sophisticated, high net worth individuals who can afford and are willing to incur substantial losses, the writing of puts or uncovered calls would be unsuitable for just about everyone.
Nevertheless, brokers sometimes engage in inappropriate options trading on behalf of customers who do when buying a call option understand the risks.
Profits from Buying a Call Option: Payoff Diagram 👍
If you have lost assets because your stockbroker was engaging in options trading, please contact us today. Have Questions? Just Ask!
Key Takeaways Buying calls and then selling or exercising them for a profit can be an excellent way to increase your portfolio's performance. Investors often buy calls when they are bullish on a stock or other security because it affords them leverage. Call options help reduce the maximum loss an investment may incur, unlike stocks, where the entire value of the investment may be lost if the stock price drops to zero. Investors most often buy calls when they are bullish on a stock or other security because it offers leverage. Consider the graphic illustration of the two different scenarios below.