As your knowledge of puts and calls grows, you will want to consider trading strategies that can be used to make money in the options market. One of these is buying call options and then selling or exercising them to earn a profit.
Covering a call is the act of selling calls to someone in the market in exchange for the option premium. When you're buying a call, you will be paying the option premium in exchange for the right but not the obligation to buy shares at a fixed price by a certain expiry date.
If you need to brush up on the basics of option trading, please see the Options Basics Tutorial. With over five hours of on-demand video, exercises, and interactive content, you'll learn everything from calculating breakeven points to exploring advanced concepts like straddles and spreads.
Is It My Calling? This is completely false. The focus of this article is the technique of buying calls and then selling them or exercising them for a profit. We will not consider selling calls and then buying them back at a cheaper price - this is called naked call writing and is a more advanced topic. In this article the term "trading calls" means first buying a call and then closing out the position later - such a strategy is called "going long" on a call.
To learn more about making money going long on a put, see Prices Plunging? The Underlying Idea The basic reason for buying calls is that you are bullish on a stock. Why couldn't you just buy the stock and not worry about options? After all, stocks never expire - you could hold onto a stock forever - whereas options do.
So, why consider an investment that has an expiry date? The reason is simple: Consider the following example: One important thing to consider is that payoffs depend on closing prices a month from today. The example deals with a one-month option, but you can have options that last for different lengths of time.
LEAPS , for instance, expire more than a year away. Let's look at a graphic illustration of your choice:. As you can see from the graph, the payoffs for each investment are different. Remember that buying a call option gives you the right but not the obligation to buy the stock, so your maximum losses are the premiums you paid. Closing Out The Position You can close out your call position by selling the call back into the market or by having the calls exercised, in which case you would have to deliver cash to the person who sold you the call.
Note that the payoff from exercising or selling the call is identical: Conclusion Trading calls can be a great way to increase your exposure to a certain stock without tying up a lot of funds. Because options allow you to control a large amount of shares with relatively little capital, they are used extensively by mutual funds and large investors. As you can see, trading calls can be used effectively to enhance the returns of a stock portfolio.
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