What are Call Options, How they Work, How to Buy & Sell? (2024)

FAQs

What are Call Options, How they Work, How to Buy & Sell? ›

The textbook definition: “An option is a contract that gives the owner the right, but not the obligation, to buy or sell a financial asset at a fixed price for a set period of time … A call option gives the buyer the right, but not the obligation, to buy the underlying stock at a fixed price until a certain date.”

Call options are “in the money” when the stock price is above the strike price at expiration. The call owner can exercise the option, putting up cash to buy the stock at the strike price. Or the owner can simply sell the option at its fair market value to another buyer before it expires.

A call option writer makes money from the premium they receive for writing the contract and entering into the position. This premium is the price the buyer paid to enter into the agreement. A call option buyer makes money if the price of the security remains above the strike price of the option.

An option holder is essentially paying a premium for the right to buy or sell the security within a certain timeframe. If market prices become unfavorable for option holders, they will let the option expire worthless and not exercise this right, ensuring that potential losses are not higher than the premium.

Selling a call option

The call seller will have to deliver the stock at the strike, receiving cash for the sale. If the stock stays at the strike price or dips below it, the call option usually will not be exercised, and the call seller keeps the entire premium.

Selling a call option has the potential risk of the stock rising indefinitely. When selling a put, however, the risk comes with the stock falling, meaning that the put seller receives the premium and is obligated to buy the stock if its price falls below the put's strike price.

The price to pay for the options.

Using our 50 XYZ call options example, the premium might be $3 per contract. So, the total cost of buying one XYZ 50 call option contract would be $300 ($3 premium per contract x 100 shares that the options control x 1 total contract = $300).

A call is an option contract giving the owner the right, but not the obligation, to buy an underlying security at a specific price within a specified time. The specified price is called the strike price, and the specified time during which the sale can be made is its expiration (expiry) or time to maturity.

1. Selling Covered Calls – The Best Options Trading Strategy Overall. The What: Selling a covered call obligates you to sell 100 shares of the stock at the designated strike price on or before the expiration date. For taking on this obligation, you will be paid a premium.

For instance, 1 ABC 110 call option gives the owner the right to buy 100 ABC Inc. shares for $110 each (that's the strike price), regardless of the market price of ABC shares, until the option's expiration date.

What is the downside to selling options? ›

This is because the most you can lose is 100% of your investment if the option expires worthless. Selling options is riskier because your potential losses are uncapped. As the option seller, you receive the premium upfront but are obligated to buy or sell the underlying asset at the strike price if assigned.

The seller of the option is obligated to sell the security to the buyer if the latter decides to exercise their option to make a purchase. The buyer of the option can exercise the option at any time prior to a specified expiration date.

A naked or uncovered call is when you sell a call option without owning the underlying security or some equivalent. The seller (writer) of the call gets immediate premium income from the option's buyer and will collect the full amount if the option expires out of the money.

In most cases, an investor would rather buy a call than the underlying stock because of the significantly lower cash outlay for the call.

A covered call can compensate to some degree if the stock price drops, the short call expires OTM, and the premium received from the short call offsets the long stock's loss. But if the stock drops more than the premium received from selling the call option, the covered call strategy begins to lose money.

Take a look at the covered call risk profile in the chart below. If you sell the call, you'll receive cash (premium), which is immediately deposited into your account (minus transaction costs). The cash is yours to keep no matter what happens to the underlying shares.

Buying options involves the risk of losing the initial premium but offers the potential for unlimited gains. Selling options can generate immediate income but exposes the seller to potentially unlimited losses. If sellers also buy other options to make spreads, it will limit both their upside and their downside.

Yes, you can buy and sell options on the very same day.

Can I sell a call option early? Yes – call option buyers can close the position at any time by selling the contract for the market value. This is a popular choice, as many traders just speculate on the call option price itself, rather than converting the call option into shares of stock.

Example of Selling Call Options

For instance, there is a stock ABC trading at 1,000 per share. You could sell a call on that stock with a 1,000 strike price for 200 with expiration in eight months. One contract would give you 20,000 (this is 200*1 contract*100 shares).