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:
- you
can buy the stock
- you
can buy call options on the stock, or
- 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.
nice blog ,easy language,call option explained in simple terms
ReplyDeletegood blog.i m regular reader of your blog, the post like this gives clear view of call option.
ReplyDeleteCALL OPTION EXPLAINED IN THIS POST THROUGH AN EXAMPLE IS VERY GOOD
ReplyDeletegood job done.this article gives an easy language explaination of call option
ReplyDeleteit is better to buy in the money call option or out of the money call option
ReplyDeletecan u explain about put option,what is risk in put option
ReplyDeletesure ,u can read our post on put option in simple language as what is call option
Deletegoob blog on basics pf option trading..nice artickes for beginners in option call put trading
ReplyDelete