Read on to find out how to trade call options and how you can calculate potential call options profits and losses prior to trading live on a stock or commodity.
What Is A Call Option? Buying call options is a bullish strategy using leverage and is a risk-defined alternative to buying stock. Call options assume that the trader expects an increase in stock price following the purchase of the options contract. For the trader to profit, the stock price has to increase more than the strike price and the options premium combined. How Do Call Options Work?
What is option calculator? How to use option calculator?
The trader is either risk-averse, wanting to know beforehand their maximum loss, or wants greater leverage than simply owning shares of XYZ. Please note, this is an example trade — not a recommendation.
How to use option calculator?
Calculation of options graph shows the hypothetical stock as per the above example: There are numerous reasons to be bullish: the price chart shows very bullish action stock is moving upwards. The trader might have used other indicators like MACDStochasticsor another technical or fundamental reason for being bullish on the stock.
Understanding How Options Are Priced
Call Options Have Clearly Defined Risk When a call option is purchased, the trader instantly knows the maximum amount of money they can possibly lose. This is the risk-defined benefit often discussed about as a reason to trade options.
Are Call Options Complicated? When buying call options, you need to predict the correct direction of stock movement, the size of the stock movement, and the time period the stock movement will occur.
This is more complicated than stock buying when all a person is doing is predicting the correct direction of a stock move. To summarize, in this partial loss example, the option trader bought a call option because they thought that the stock was going to rise.
Buying Call Options: The Benefits & Downsides Of This Bullish Trading Strategy
What About Complete Loss? If you already understand call options, you can explore some of our commodity guides to find a suitable asset to practice with, like precious metalsenergiesand agricultural commodities. Alternatively, you can see our stock trading guide. Buying call options has many positive benefits like defined-risk and leverage, but like everything else, it has its downside, which is explored on the next page.
Option trading is a highly rewarding way to supercharge your returns!
That sized movement is possible, but highly unlikely in only 30 days. Plus, the stock has to move more than that 6. However, the benefit of buying call options to preserve capital does have merit. Buying call options and continuing the prior examples, a trader is only risking a small 1.
This prevents the trader from incurring a single substantial loss, which is a real reality when stock trading. Stock Losses vs. Important: This is not investment advice. We present a number of calculation of options arguments for and against investing in this commodity.
How to Close a Diagonal Options Spread Options trading is a dynamic and exciting component of modern investing. Options traders typically use leverage to create unique opportunities for significant rewards and risks alike. An options trade is essentially the purchase of a contract that provides the investor with the option to buy or sell a specific asset at a predetermined time in the future for an agreed-upon price. Because of the unique contractual nature of these trades, investors will often calculate the anticipated return on an options contract before initiating the transaction. Fortunately, learning how to identify and use the option return formula is relatively straightforward and can be accomplished using a few simple steps.
Please seek professional advice before making investment decisions. If you are interested in trading options, look at our reviews of these regulated brokers available in : Regulated Options Brokers Available in Loading table CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Also see our guide to choosing an online options broker.
Further Reading For additional options types and options strategy guides, see: Put Option — Puts are a risk defined alternative to shorting stock, puts max leverage and minimize risk Bull Call Spread — A risk defined and reward defined alternative to buying call options.
Bear Put Spread — A cheaper alternative to buying put options outright, however, defines max reward.
Traders who want to build an options strategy may find technical analysis guides on relative calculation of options index RSIvolume indicatorsand moving average convergence divergence MACD index useful. Written by Lawrence Pines Author Lawrence Pines is a Princeton University graduate with more than 25 years of experience as an equity and foreign exchange options trader for multinational banks and proprietary trading groups.
InMr. Pines started his own consulting firm through which he advises law firms and investment professionals on issues related to trading, and derivatives. Lawrence has served as an expert witness in a number of high profile trials in US Federal and international courts.