What Is Call Option
Call option is referred to as a contract between buyer and seller which provides the buyer all the rights to purchase the specific stocks of shares at a specific price and within a specific period of time.
Although the buyer is provided the right to buy the shares whenever he or she is willing to but the right doesn’t mean it is an obligation, it is simply the buyer’s choice. Where as in call option the seller is obligated to sell the shares if buyer decides to purchase them. Usually call options are used with stocks but they can be used with bonds or other financial assets as well.
The important terms associated with call options are;
Option Premium: referred to the amount the buyer pays for the option.
Expiration Date: is the date by which call option must be exercised afterwards buyer looses the all the rights reserved.
Strike Price: is the price at which the stock can be purchased before the expiration date.
Intrinsic Value: it is the difference between stock’s current market price and the strike price.
When to Trade In Call Option
It is best to trade in call option when the current market price of the stock is greater than the strike price because in this case the buyer will generate profits by call option trading. Whereas, if the current market price of stock is lower than the strike price, in this case the buyer will be in loss if he decides to trade. So, call option trading generates profits only when current market price of stocks is higher than the strike price only then is the right time to trade in call options.
Hence, we can say that call option trading is not as complicated as it is thought to be and one can easily generate profits out of it if he knows the ins and outs of this type of trading really very well. The buyer will gain profits when he sells the stock at a higher price than the actual strike price and on the other hand the seller lives in the hope that the stock price doesn’t goes up, it should remain stagnant or decline.
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