The Basics of Call Options
June 1, 2010 by Options Choices
Filed under Call options
Nick Perry of Schaeffer’s Investment Research explains options. If you are new to options, this slide show offers a quick “five minute” introduction to call options. It covers the basics of what a call option “is” and walks through an aggressive call buying strategy. Please note, this is only meant as a brief introduction to the topic. Please seek out more information about the risks before trading options.
@adulamunda
From what I understand, there is two situations. First, the buyers might not have the money to purchase all the share for $50 now, but in the future, he/she might have the money to get the share for $55. Second, when the stocks do get to $57, the buyer might negotiate the seller to get the difference while the seller keeps the stock. The seller then can sell the stocks for a profit.
But that is what I know
what is rally?
@adulamunda Firstly, in this hypothetical example, he’s assuming that the option is only for a single share, so the option costs $0.50.
If you purchase the stock outright at $50, you run the risk of losing up to the whole $50 if your belief is wrong and the stock price declines.
However, if you buy the call option and the stock price declines, the option simply expires worthless, and all you lose is the $0.50 you paid for the option.
In other words, using an option limits your downside here.
because a single options contract represents 100 shears (most anyway).
so you’re buying 100 shears for $150 vs 1 shear for $50.
i hope i understood your question
Maybe someone can help me. If someone believed the stock would rally to $57, why would he pay $150 for the right to purchase the stock at $55 when he could profit more if purchased now, at $50?
You either sell the call for a profit or go through the hassle of exercising your right to buy the stock. Most people just take their profit by selling the option.
If you buy an option, you pay for it in full. If you lose, you lose what you paid for it, period. If you sell an uncovered option–whole different ballgame.
absolutely–options trade every day the markets are open. Even if it’s a “European-style” option that can be EXERCISED on expiration only, that option can be traded/sold/closed whenever the markets are open. If you bought it, you can sell it. If you wrote it, you can buy-to-close.
excellent video.
I really enjoyed it.
Could you please upload more videos related with options?
what if u want to sell you option before the expiration can u? does anyone know
Drags a 4 min topic to 7 min. noob.
you only lose what you pay. think of it this way – option = choice to buy shares at strike price, not obligation.
If share price does not reach $55 strike price by expiration, the option value is lost and you only lose what you paid to purchase the options.
Lets say the option expires Dec-09. If the share price exceeds the strike price (stock goes up to $57) by Jul-09, and then ends at $50 in Dec-09, it is deemed worthless IF you didn’t exercise your option in Jul-09.
its easier if u give a real example
you can lose all your money but do you have to also pay for your lose? let’s say I use 2k and make what would be a -500% loss do I owe an extra 8k or can I only lose what I put in and make a profit?
Hi, Thanks for the wonderful explanation. It cleared my doubts about options. But. one thing I want to ask you. If the price of the stock moves by $2, then our call is in profit. We can make profit by buying the stock at the strike price and selling them at the market price. But, we can also make profit by selling the call itself for profit. Or, can we do both and profit from both.
How is it exactly, pls explain.
Thank you once again for your clear explanation.
Excuse me for being a retard, but if you spend $150.00 on a contract for for 100 shares and .50 for the option a share isn’t it a break even deal at a 57.00 sell on a 55.00 strike price?
Stupid question I know but really interested in how it works
So helpful. So so so so helpful
Thank you, I like your lecture style and I learned a lot
Great video, it cleared up some questions for me.
great vid, thanks so much. keep it up
Thanks, you gave a good simple example, maybe just a bit too much of extra talking at the end – but thanks anyway
Hey Nick make a series on options and hell man Ill buy it on the spot!
Fantastic! Thanks
Thanks, you did a great job simplifying as well as explaining.
Good video! Thanks!