Call options are one of the most popular options as they rise in value with the rise in stocks. This option allows the owner to gain maximum profit by locking in a price for purchasing a particular stock on a given date. These options attract most investors as they rise in value quickly with a slight increase in the stock price.
Connect with one of the best auto options trading or Algo Trading Platforms such as SpeedBot to buy and sell options. These platforms are available for you to perform buying and selling automatically on your behalf. However, before getting into the options of buying and selling, it is essential to know the fundamentals to make you an informed and aware trader.
Here is everything you need to know about buying and selling options.
What is a Call Option?
A call option is a financial contract that permits you to buy a stock at a given price called the strike price on a specific date. The call buyer needs to pay a premium, which is the amount of money the seller receives from the former. An option only exists till expiration, with a value or without it.
There is a contract option in which one contract is equal to 100 shares of an underlying stock. The options prices are per-share prices and do not mean the total price you need to pay for owning the contract.
This is why you need to know about the call:
-> This option contract does not mean an obligation to buy the underlying security at a particular price and time.
-> While the specified price is called the strike price, the specified time when the sale is made is expiration or maturity.
-> The purchase fee is the premium.
-> One can combine call options with combination strategies.
How Does it Work?
As the stock price becomes more than the strike price at expiration, it is said that the call options are “in the money”. Then, the option buyer can:-> put up cash and purchase the stock at the strike price. -> sell the option at the market value to another buyer before the same gets expired.
The profit is derived when the premium the owner would have paid for buying the call option is lower than the difference between the stock price and strike price. So, if the trader purchased a call for INR 41 at a strike price of INR 2473, which becomes INR 2420 at expiration, the trader records a profit of INR 206, as the cost of INR 41 is deducted from INR 247.
In case the stock price falls down the strike price, then the call is termed “out of the money”. In that case, the option is worthless. The sellers can keep any premium the option fetched them.
In case the stock price falls down the strike price, then the call is termed “out of the money”. In that case, the option is worthless. The sellers can keep any premium the option fetched them.
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The Reasons for Buying a Call Option
The benefit of purchasing the call options are many. One of the main advantages is that it maximizes the stock’s price gains. So, by paying a meager upfront cost, the owner can seek lucrative gain from the rise in stock price than the strike price. When you buy a call, you can aim to receive gains as the stock rises before expiration.
Citing an example, if a stock ABC is trading at INR 50 per share, you can buy a call at INR 50 strike price for INR 5 with an expiration in 8 months. One contract will need you to pay INR 500, or INR 5 for 100 shares.
So, at that strike price, the value of the option will increase by INR 100 for a rupee increase in the stock price.
The Reasons for Selling a Call Option
When you buy a call option, there is a call that is sold too. So, if you are trying to know the benefits of selling a call, then here it is.
The paying of stock works the opposite of purchasing the call. The sellers aim to have a stock that remains just the same or declines in value, to record a profit.
The purpose of selling calls is that the seller gets an upfront cash premium without needing to pay anything instantly. The seller waits till the expiration of the stock. In case the stock falls or remains at the same value or gains very little value, the seller makes money. Though you cannot get a significant amount of money as the call buyer gets, the seller can make the premium.
Selling a call is always a low-risk proposition, however, one cannot undermine that this option strategy may prove to be the most critical one too in case of a super increase in the stocks. This way the seller will register uncapped losses. There are safe call selling tricks too like a covered call that can keep the seller safe.
Call and Put
Another option that needs a bit of attention is the put option. The value of the put options rises when the stock price sees a downfall. So, many traders purchase put options and wager on the fall of the stocks. So, one can say that put is just the opposite of the call option.
There are many similarities between put and call too, here is what you need to know about their risks and benefits:
-> Buying a put option like buying a call, lets you earn back your investment a number of times.
-> Again, just the way you buy a call option, you can buy a put option with a risk that you can lose your considerable amount of investment in case the put ends up being worthless at expiration.
-> When you sell a call option, you earn a premium and similar is the case for the put option. When you sell a put option, you earn a premium but the seller is ready for all the risk in case the stock goes in an unfavorable direction.
One of the differences between the two is that selling a call option does not lead you to risk the capped losses. But selling a put option means risking the capped losses and the sellers can lose a major chunk of money than what they got as a premium.
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Wrapping Up
Though trading is known to remain unpredictable at all times, the fact that the traders have been able to make substantial profits cannot be understated. The traders can remain cautious and use the options trading bot sensibly. When the same is used properly and researched, options trading will translate to lower risks and higher profit.
To ensure that you gain on a stock, you can connect with experts in the field. SpeedBot is one of the finest platforms that can immaculately manage options for buying and selling. SpeedBot can help traders to execute simple to complex options trading strategies automatically. In case you are a pro options trader and have been dreaming to create your own options strategy, you can do so without needing to code them.
