The formula for calculating maximum profit is given below: However, this risk is no different from that which the typical stockowner is exposed to. The formula for calculating loss is given below: It is interesting to note that the buyer of the call option in this case has a net profit of zero even though the stock had gone up by 7 points.
A Call Option is security that gives the owner the right to buy shares of a stock or an index at a certain price by a certain date. That "certain price" is called the strike priceand that "certain date" is called the expiration date.
A call option is defined by the following 4 characteristics: There is an underlying stock or index There is an expiration date of the option There is a strike price of the option The option is the right to BUY the underlying stock or index.
This contrasts to a put optionwhich is the right to sell the underlying stock Long Call Example A call option is called a "call" because the owner has the right to "call the stock away" from the seller.
It is also called an "option" because the owner has the "right", but not the "obligation", to buy the stock at the strike price. In other words, the owner of the option also known as "long a call" does not have to exercise the option and buy the stock--if buying the stock at the strike price is unprofitable, the owner of the call can just let the option expire worthless.
The most attractive characteristic of owning call options is that your profit is technically unlimited. And your loss is limited to the amount that you paid for the option. Look at this call options payoff diagram and you will see what I mean. Theoretically the stock price can go to infinity so that is why they say the earnings from owning a call option are unlimited.
Since owning options is always cheaper than owning the stock itself, when you KNOW a stock price is about to move up it is ALWAYS more profitable to own calls on the stock than it is to own the stock itself!
Keep reading and I will explain why. Take a look at the screen shot to the right that is from my Etrade account. Since call options give the owner the right to buy a stock at a fixed price, owning calls allows you to lock in a maximum purchase price for a stock. It is a maximum purchase price because if the market price is lower than your strike price, then you would buy the stock at the lower market price and not at the higher exercise price of your option.
It is called "a call option" because it allows you to "call" the stock away from somebody ie, buy it. The collection of buyer and sellers, and their expectation of the movement of the underlying stock, determine the current prices.
Look at the screen print of the MSFT options above. When to Buy Call Options Examples: If you think a stock price is going to go up, then there are 3 trades that you can make to profit from a rising stock price: Before we get too far along in talking about call options and trading call options, you need to understand that a stock price can move in three directions, not just two: A stock price can go up A stock price can go down, and It can stay the same!
Keep these 3 directions in mind as you read on. The rest of this page is devoted to understanding what call options are. Continue reading for more examplesThe covered call is an option strategy used to generate options income on an asset already held in a portfolio.
Loading DocCommentXchange Loading DocCommentXchange. Call Option examples, Call Option definition, trading tips, and everything you need to help the beginning trader.
Using the covered call option strategy, the investor gets to earn a premium writing calls while at the same time appreciate all benefits of underlying stock ownership, such as dividends and voting rights, unless he is assigned an exercise notice on the written call and is obligated to sell his shares.
The Equity Strategy Workshop is a collection of discussion pieces followed by interactive worksheets.
The workshop is designed to assist individuals in learning how options work and in understanding various options strategies. Covered Call Writing With Exchange Traded Funds (ETFs): Double-Digit Returns, Diversification, Downside Protection Plastic Comb – July 1,