Call option is one of the forms of the options trading which is basically treated as a security with the help of which an owner can buy a certain number of shares or index at a certain date. There are four characteristics that can be used to define the call option which are as follows:
- The proposed stock or index
- The expiry date of the option
- The strike price of the option
- It offers the right to buy the proposed stock or index at a given price.
This particular option is referred to as call because the owner can call the stock away from the seller as they hold the right for it. Moreover, the benefit associated with the owner, in this case, is that he/she does not need to exercise or buy the stock, it can be left untouched till the expiry date if the strike price happens to be unprofitable. The call option is used for a variety of purposes some of which are as follows:
Call option for management of tax
Investors often use call options as a way to change the allocation of their portfolio which selling or buying the proposed security.
Call option for Income Generation
There are several strategies involved in owning the call option out of which the covered call strategy is used for generating income from the given stock. The process of this strategy is such that owner can either sell the call option or allow someone else to get hold of the stock. The investor then waits for the stock to get expired and gets the right to collect the premium. The only flip side to this strategy is that it might limit the potential of earning the profit if the stock prices rise up suddenly.
Call Option for Speculation
The contracts that are signed in the name of options give a lot of exposure to a particular stock at a comparatively lower price. If the stock is used separately, then it might result in significant gains if the stock rises incessantly, or can even go into a loss of the call options expires during the inflation.
Calls are often traded on an exchange which is quite similar to the stocks. Just like all the securities the call options too have a unique ticker symbol and the price of each of these units is determined by the buyers and sellers of the stocks. The current price of the call option is calculated on the basis of the buyer and sellers along with the change that arises in a particular stock. Just like the stocks, the options also have a buying and selling price, but there is a significant difference in the spread because the selling price is usually higher than the bid price.
One of the best things about owning call options is that you get an unlimited amount of profit, and the loss that you encounter is usually limited to the amount that might have paid for the option. Another advantage associated with the call option is that the owner has the right to purchase a particular stock at a given price which is usually kept fixed, and then you can always lock it in a maximum buying price. Thus, if the market is not doing well and strike price is higher than the market price, then you would be able to buy a particular stock at a lower market price. Moreover, you can always call the stock away from someone if you have given them the power of the call option.
At last, this was all about the basics of the call option. You eventually need to invest in them if you wish to gain knowledge of how they actually work so as to understand them better.