When you purchase a call option you get a contract that entitles you to buy the underlying commodity or financial instrument, such as a share of stock, at a guaranteed price called the strike price.

You pay a fee called a premium for the call option, and you can exercise your right to buy until the option expires. Call options have advantages that make them powerful tools for investors.

The premium for a call option costs far less than the equivalent underlying security. The resulting leverage increases the potential return on your investment. That is a percent profit. Call options have a reputation for being high-risk investments, and in some ways that is true.

Suppose the price of the underlying security for a call option does not rise above the strike price before the option expires. The option is worthless and you lose all the money you put up. However, the premium is the limit of your risk.

If the shares you bought of XYZ Corp. You can generate additional income by switching roles and selling call option contracts. When you are the seller, you are known as the option writer. Suppose you own stock that has appreciated since you bought it.

You can write a call option with a strike price equal to the current market price and collect a premium. In options trading, this is referred to as a covered call. If the call option you wrote is exercised, you sell the shares you own to complete the contract. You keep the premium along with the gains you made on the stock up to the strike price.

The premium then offsets part of the loss from the fall in the stock price.

Options Trading - Advantages and Disadvantages | ZeroMillion

Trading call options allows you to employ a variety of income-enhancing and risk-reducing strategies using combinations of options and the underlying security. This strategy involves two call options that are identical except for the strike price. You purchase a call option with a strike price near the market price and simultaneously write a call option at a higher strike price.

The premium you collect for the call you write offsets download forex untuk pemula or part of the premium you pay for the call option you buy. This does limit the potential profit, since if the price of the underlying security rises above the strike price of the option you wrote, any further gains forex 400 bonus the call you bought are offset by losses on the call you wrote.

However, a bull call spread has the effect of reducing your up-front investment and hence your risk.

Call and Put options - All the advantages of these options

Based in Atlanta, Georgia, W D Adkins has been writing professionally since He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University.

What are the advantages of buying a put option rather than short selling a stock?

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This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. These returns cover a period put option advantages and were examined and attested by Baker Tilly, an independent accounting firm.

Visit performance for information about the performance numbers displayed above. Skip to main content. How to Execute a Call Option If Most of the Call Options on a Stock Are in the Money Is It Likely That the Stock Price Has Risen? How to Buy an Option to Forex licence in belize Stock in Future What Is Buying a Put in the Stock Market? How to Determine the Price to Pay for a Call Option.

How To Sell Put Options To Benefit In Any Market

Leverage The premium for a call option costs far less than the equivalent underlying security. Limited Risk Call options have a reputation for being high-risk investments, and in some ways that is true. Covered Calls You can generate additional income by switching roles and selling call option contracts. Flexibility Trading call options allows you to employ a variety of income-enhancing and risk-reducing strategies using combinations of options and the underlying security.

Puts and Calls The Options Industry Council: Covered Call The Options Guide: About the Author Based in Atlanta, Georgia, W D Adkins has been writing professionally since Recommended Articles What Do I Do if the Price of the Stock That I Sold an Option on Goes Above the Strike Price?

How Stock Splits Affect Call Options How to Buy Stock Calls Three Factors That Affect a Call Option's Value. Related Articles What Happens to Shares in a Bull Call Spread? Money Sense E-newsletter Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more.

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