Buying Call Options is it worthwhile

Call Options

 

An investor is very bullish and wants to commit limited captital could consider to buying call options instead of purchasing shares.

Buying a call is one of the simplest strategies used by starting options investors. It allows an investor the opportunity to to profit from an upward move in the price of the underlying stock. You only have a small capital at risk with an stock option than with the outright purchase stocks.

Buying a call gives the owner the right to buy 100 shares of underlying stock at a specified  strike price  at any time before a specific time. This time we also call the expiration date.

This is regarded a bullish strategy. The value of the call option increases when the underlying stock price rises.

long call or buy calls

The profit potential for the long call is unlimited as the underlying stock continues to rise. The financial risk is limited to the total premium paid for the option, no matter how low the underlying stock declines in price. The break-even point is an underlying stock price equal to the call’s strike price plus the premium paid for the contract.

As with any long option, an increase in volatility has a positive financial effect on the long call strategy while decreasing volatility has a negative effect. Time decay has a negative effect.

Buying call options

Buying calls is considered a defined risk position with potentially unlimited profits, at least in theory. You can earn unlimited profits when the underlyings moves up. Your loss is limited to the option premium you have paid for.

Price and Delta in Options

Delta helps traders figure out the rate of change for an option compared to the underlying futures position.  The underlying futures position will always have a delta of 100.

Around 50       at the money option

00 – 49           an out-of-the-money

51 – 100         in-the-money option.

How can you use delta? in trading If a call option has a delta of 35, it can be expected to change in value at 35% of the rate of the underlying futures position.  Simply, if the underlying futures rises 1.00, the call option can be expected to rise by .35.  As an option increases in value, the delta will change and begin moving more like the underlying position.

You only make money when the underlying moves above the break even. And when the it does so the premium in the option get smaller. So it needs to move enough to compensate this in order to make a profit. The call buying strategy significantly underperform regarding other strategies like selling a put.

Selling Call Options

Instead of purchasing call options, one can also sell (write) them for a profit. Call option writers, also known as sellers, sell call options with the hope that they expire worthless so that they can pocket the premiums.

 

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 call spread is an options strategy in which equal number of call option contracts are bought and sold simultaneously on the same underlying security but with different strike prices and/or expiration dates. Call spreads limit the option trader’s maximum loss at the expense of capping his potential profit at the same time.

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