Wednesday, 18 April 2012

WHAT IS CALL OPTION



CALL OPTION

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: 
  1. you can buy the stock
  2. you can buy call options on the stock, or
  3. you can write put options on the stock

Buying stock need huge capital investment plus your total capital is @ risk
Writing put option also need huge margin and risk associated with it is unlimited
Buying call option give u unlimited profit upside and limited risk downside.
Only enemy of call option is time so u should book your profits as early as possible.



Let’s understand using an example. Suppose, today’s date is 18-APR-2012 and you buy a RELIANCE CALL option (strike=800, EXPIRY  MAY 31) @ Rs. 20  per contract when RELIANCE stock was getting traded at 760. Let’s see what happens after options expiration.

Case I : Reliance stock price greater than the strike price. Reliance stock trading at 840on expiry day cut-off time

Net profit = (current price – strike price) - premium = (840–800 ) -20= Rs. 20 per contract

Case II : Reliance stock price less than strike price (800) on expiry day cut-off time
Net loss = Premium paid = Rs. 20 per contract

So when you buy a CALL option you have unlimited profit potential but limited risk or downside.



8 comments:

  1. nice blog ,easy language,call option explained in simple terms

    ReplyDelete
  2. good blog.i m regular reader of your blog, the post like this gives clear view of call option.

    ReplyDelete
  3. CALL OPTION EXPLAINED IN THIS POST THROUGH AN EXAMPLE IS VERY GOOD

    ReplyDelete
  4. good job done.this article gives an easy language explaination of call option

    ReplyDelete
  5. it is better to buy in the money call option or out of the money call option

    ReplyDelete
  6. can u explain about put option,what is risk in put option

    ReplyDelete
    Replies
    1. sure ,u can read our post on put option in simple language as what is call option

      Delete
  7. goob blog on basics pf option trading..nice artickes for beginners in option call put trading

    ReplyDelete