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Call Options


Call options (or "calls") give you the right, but not the obligation, to buy an underlying security at a specific price for a fixed period of time. Traders may buy calls when they believe an underlying security (e.g., a particular stock or an index) will rise in price. If they wish to sell the underlying security, they must do so before the option expires on a predetermined expiration date.

The financial risk of buying a call is limited to the premium paid for the option. If the option expires worthless, the premium will be lost (assuming the put option was not sold to another trader prior to expiration). If the price of the underlying stock or index moves higher, that is to say, above the strike price, the call buyer can make a profit.

A call seller, also called the "writer", takes on the obligation of selling an underlying security from the call buyer at a predetermined strike price, up until a specified expiration date. Call sellers make money by collecting option premiums from put buyers. If a call expires worthless (i.e., if the call buyer cannot exercise the call option at a profit), the call writer keeps the premium.

A simple example illustrates how calls may be used:

Assume the current price of a particular stock is $30. Also assume that you buy a call, which gives you the right, but not the obligation, to buy the underlying stock from the call writer at a strike price of $30. You have the right to buy the stock at that price, as long as the put has not yet expired; say for three months from today. For acquiring this right, you paid a premium of $1 per contract (i.e., per 100 shares of the underlying stock).

If after some time the stock has raised to $40, you may choose to exercise your put option. The call seller must sell your stock for $30. (You could at this point sell it for $40, pocketing the difference as your profit). In this case, by investing $1 you are making $9 (900%).

On the other hand, if the stock moves down instead of up, say to $25, your call will expire worthless. In this case, you lose the premium you paid (100% of invested money) for the option while the call seller keeps the premium he or she received from you.

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The Information on the Site is provided for information purposes only. The Information is not intended to be and does not constitute financial advice or any other advice. The trading of stocks, futures, commodities, index futures or any other securities has potential rewards, and it also has potential risks involved. Trading may not be suitable for all users of this Website. Past performance is not necessarily an indication of future performance. You absolutely must make your own decisions before acting on any information obtained from this Website.

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