Call options

  • Call options:  The buyer of the call option has the right to buy the asset at a specific price on or before the expiration date.   The seller of the call option has the obligation to sell the asset to the buyer at said price on or before the expiration date.

The price of the contract known as Premium is the amount the seller collects from the buyer for taking on the risk.  If the contract is not exercised the seller gets to keep the premium.

    • Buying a Call option is a considered a bullish position.   Owners of Call options will profit when the underlying goes up in price.
    • Selling a call option is considered neutral/bearish.  The seller of the call option will profit if the underlying trades flat or goes down in price.

If a trader/investor suspects that the market is due for a rebound or upward move they could purchase a Call option to capitalize on significant gains if the market rises.

If a trader owns over 100 shares of a single stock they could sell a Call option and collect premium.   This would be like receiving another divided.  If the stock stays below your strike price you would keep the premium.  If the stock closes above your strike price you would be obligated to sell the stock but you still keep the premium.

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