Call option & Put option? Option Strategy 2024

Call option

Call option is a type of financial contract that gives the holder the right, but not the obligation, to buy a specified quantity of a particular asset, typically a stock, at a predetermined price within a specified period of time.

Let’s break down the components:

1. Right, not obligation: When you buy a call option, you have the right, but you’re not obligated, to buy the underlying asset (usually stocks) at a predetermined price. This means you have the choice to exercise the option or not, depending on whether it’s beneficial for you.
2. Predetermined price (Strike Price): The strike price, also known as the exercise price, is the price at which you have the right to buy the underlying asset. This price is agreed upon when the option contract is created.
3. Specified period of time (Expiration Date): Call options have an expiration date, which is the date by which you must exercise the option if you choose to do so. After this date, the option becomes worthless and expires.
4. Underlying asset: Call options are typically written on stocks, but they can also be written on other assets like commodities or indexes.

Here’s a simplified example to illustrate how a call option works:

Let’s say you’re interested in Company ABC, whose stock is currently trading at $50 per share. You believe that the stock price will increase in the near future. Instead of buying the stock outright, you decide to buy a call option.

• Call Option Details: You buy a call option for Company ABC with a strike price of $55 and an expiration date one month from now.
• Scenario 1 (Stock Price Increases): Before the expiration date, the stock price of Company ABC rises to $60 per share. Since the market price is higher than the strike price of your call option ($55), you can exercise your right to buy the stock at $55 per share. You can then sell the stock at the market price of $60, making a profit of $5 per share ($60 – $55).
• Scenario 2 (Stock Price Stays Below Strike Price): If, by the expiration date, the stock price remains below $55, you might choose not to exercise the option because it wouldn’t be profitable to buy the stock at $55 when it’s available for less in the market. In this case, you would let the option expire worthless, losing only the premium paid for the option.

In summary, call options provide investors with the opportunity to profit from an anticipated increase in the price of an underlying asset without having to purchase the asset outright. However, it’s essential to understand the risks associated with options trading, including the potential loss of the premium paid if the option expires worthless.

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