Examining the Basis of Call Options

By: Montana Timpson

Buying call options is bullish, by nature, representing an optimistic view on the rising price of underlying shares. With market news dominated by unprecedented short squeeze phenomena, recent tech earnings and the record number of active traders in the US market, we’re going back to the foundations of call options — and examining the basis of positive speculation on assets as a whole.

The Basics
Call options are financial contracts that give the option buyer the right — but not the obligation — to buy a stock, bond, commodity or asset at a specified price at a specified date (European style call) or within a specific time period (American style call).  In short, a call buyer’s profit is linked to the increase in an underlying asset’s price.

For options on stocks, call options give the holder the right to buy 100 shares of a company at a specific price, referred to as the “strike price,” up until, in the American style, or at, in the European style, a specified date, known as the “expiration date.” For a given asset, there is typically a multitude of available options at different strike prices and expiration dates. A call option buyer may hold the contract until the expiration date — at which point they can “exercise” the option and take delivery of the 100 shares of stock at the strike price, or they can sell the options contract at any point before the expiration date at the market price of the contract at that time. The market price, called the “premium,” is the price paid for the rights that the call option provides. 

Make sure to fully understand an option contract’s value and profitability when considering a trade. Though option contracts give buyers the opportunity to obtain significant exposure to a stock for a relatively small price, they can also result in a 100% loss of premium if the call option expires worthless due to the underlying stock price failing to move above the strike price. The benefit of buying call options, in this way, is that risk is always capped at the premium paid for the option, in contrast to a losing short position, where losses can theoretically be unlimited.

Covered Calls
Some professional traders use call options to generate income through a covered call strategy, in which a trader writes a call option contract while concurrently owning an equivalent number of shares of the underlying stock. Potential benefits of this strategy for professional traders include slight downside protection (the premium received for the calls effectively reduces their net purchase price of the stock) and the ability to declare premiums received from selling a covered call as income.

Strategies
Here’s a quick look at five basic call option strategies for professional traders. For more details on each, check out Lightspeed’s Trading Education Center.

For additional references, guides and resources, view our active trading blog, and register now for our next live webinar.

Active Trading with Lightspeed
Lightspeed provides professional traders with all the tools required to help them find success in stock trading, and we have been developing and honing our active trader platform to offer an optimal user experience. With the intuitive interface layouts and institutional quality stock and options scanners, we aim to help traders reach their goals, no matter what their strategy is. We also offer our clients some of the lowest trading fees in the industry.

For more information on a professional trading platform with Lightspeed, please call us at 1-888-577-3123, request a demo, or open an account.

Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content are solely based on the users’ independent analyses taking into consideration your financial circumstances, investment objectives, and risk tolerance.

You may also be interested in...

The IPOX® Week, October 18th, 2021
Read More
4 Bad Habits That Stock Traders Should Break
Read More
Understanding the Difference Between Option Volume and Open Interest
Read More
The IPOX® Week, October 11th, 2021
Read More

Try the demo

Compare Platforms
Check the background of this firm on FINRA's BrokerCheck

Our website uses cookies to improve the performance of our site, to analyze the traffic to our site, and to personalize your experience of the site. You can control cookies through your browser settings. Please find more information on the cookies used on our site in our Privacy Policy. By clicking OK, you agree to allow us to collect information through cookies.

OK