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A call option gives its buyer the right to purchase a certain issue of stock at a specified price (called the strike price) on or before a specific date. Say, 100 shares of Acme at $20 per share, for which the purchaser pays a nonrefundable premium of 75 cents per share.
A call goes in-the-money if the share price is higher than the strike price. However, it makes no financial sense to exercise the option unless the share price goes higher than the sum of the strike price plus the premium...in this case, you break even at a share price of $20.75. Since you can hold calls until they expire, you'd obviously want the share price to go higher than $20.75 because no one plays the Stock Market to break even!
There are two risks associated with calls: the call could expire worthless, which causes you to lose your premium; and the stock price might not go high enough to meet your investing goal. Back to Acme: You want to make $500 out of this transaction. The strike price is $20, the premium is 75 cents and your online broker charges $10 per transaction (10 cents per share) when you sell, so each share costs $20.85. To make $500 profit on this deal, Acme must hit at least $25.85. If the stock hits $23 and plateaus, you'll make money but not as much as you wanted.
What else can I help you with?
Buying the call option is risky?
Buying calls isn't very risky. If the option expires out-of-the-money, all you lose is your premium. If it expires enough in-the-money to cover the price of the stock plus the premium on the call, you make money--potentially a LOT of money if the stock price shoots up.
What are the differences between buying a call and selling a call option?
Buying a call option gives you the right to buy a stock at a specific price, while selling a call option obligates you to sell a stock at a specific price.
Why is selling a call or put more risky than buying a call or put?
Selling calls or puts have unlimited risk, where as buying calls or puts have a maximum risk of 100%. For instance, selling a call gives you unlimited risk because there is no ceiling on how high the price can go. However buying a call has a maximum risk of 100% of the premium you pay, this happens if you let the option expire.
Why was buying on a margine risky?
If the stock has not gone up when the margin call is due, you lose money.
What is the difference between buying a call option and selling a put option?
Buying a call option gives you the right to buy a stock at a certain price, while selling a put option obligates you to buy a stock at a certain price.
What does the call option graph show in relation to stock prices and potential profits?
The call option graph shows how potential profits from buying a call option change with different stock prices. It illustrates the relationship between stock prices and the potential profits that can be made from the call option.
What is exercising a stock option?
Exercising options is done by the option buyer. If the buyer exercises a put, he is selling to the option writer the stock. If a call is being exercised, he is buying the stock from the writer.
What are the differences between a call option and buying stock?
A call option gives the holder the right to buy a stock at a specific price within a certain time frame, while buying stock means purchasing ownership in a company. Options have expiration dates and involve paying a premium, while buying stock is a direct investment in the company's shares.
Buying car from person who is still paying?
Risky business, I wouldn't do it.
Can anyone solve this derivative question - piesinpiexx1-x 4 for each x belongs to 01?
We have two portfolios the first you have stock and put option with a strike price X for example ( $50 ). strategy of buying a call option with strike price X for example ( $50 ) in addition you buy a treasury bills with value equal to the exercise price of the call , and with maturity date equal to the expiration date of the two option . are you can pricing the put option if you know the call option price ? Regards,HEBA Khereba We have two portfolios the first you have stock and put option with a strike price X for example ( $50 ). strategy of buying a call option with strike price X for example ( $50 ) in addition you buy a treasury bills with value equal to the exercise price of the call , and with maturity date equal to the expiration date of the two option . are you can pricing the put option if you know the call option price ? Regards,HEBA Khereba We have two portfolios the first you have stock and put option with a strike price X for example ( $50 ). strategy of buying a call option with strike price X for example ( $50 ) in addition you buy a treasury bills with value equal to the exercise price of the call , and with maturity date equal to the expiration date of the two option . are you can pricing the put option if you know the call option price ? Regards,HEBA Khereba
What is the most effective option strategy for maximizing profits in the stock market?
The most effective option strategy for maximizing profits in the stock market is the long call option strategy. This strategy involves buying a call option on a stock with the expectation that the stock price will rise significantly. If the stock price increases, the call option will also increase in value, allowing the investor to profit from the price movement.
What does stocks on margin mean?
05/08/08 Buying on margin means that you are buying your stocks with borrowed money_______________________________________________________________It means that you've borrowed money to finance your stock purchase. This is very risky and may lead to a margin call if the share price declines.
