Calls

Call options

A call option is a contract that gives the holder the right to buy the underlying stock at a predetermined strike price, by a fixed expiration date, for a premium whose value varies depending stock price, and greeks.

The contract is written by the option seller who either owns the underlying, in the case of a covered call, or does not own the underlying, in the case of a naked call.

The buyer of the contract is called the Holder, and has a long position, the seller is called the Writer, and has a short position.

How to trade a call option

It is important to note the difference between writing a call option and holding a call option:

  • Holding a call option has limited risk with unlimited reward,
  • Writing  a call option a limited reward, and there’s two situations we can write a call in:
    • Writing naked calls has unlimited risk, that is writing a call without owning the underlying asset, as you may have to buy the underlying at expiration. Due to this, there are exceptional margin requirements for naked call traders.
    • Writing covered calls have a very high risk, but less than naked calls. If your call contract is in the money at expiration, you will have to cede the assets you own.
You may also be interested in hedging and how you can use calls to hedge short positions.
Share

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Market and trading news