Call options give you the right, but not the obligation, to buy at a specific price (strike price) by a predetermined date (expiration date).
A call gives you the opportunity to profit from price gains in the underlying stock at a fraction of the cost of owning the stock. Since call options represent shares of the underlying security (typically 100 shares per option), you can profit from stock appreciation without actually owning stock.
Buying a Call Option
On this InFabric Strategy the price of the underlying stock (QQQ Stock) is expected to rise by 1.25%. Notice QQQ 332 Call rises dramatically. We’re able to see the call option that will rise the highest when QQQ stock rises.
Even without knowing how a call option works it’s easy to see which options are rising here. But let’s explain:
- QQQ = Stock Ticker of Underlying Stock
- 332 = Strike Price
- Call = Call Option (expecting QQQ Stock to rise)
- 2021-02-12 = Expiration Date
Options are derivates of a stock, and QQQ is the underlying stock. The strike price of 332 shows the value you project the price to be in the future. You think the price of QQQ Stock will reach $332 by the expiration date.
Closing a Call Option
Exiting BEFORE Expiration:
When you sell a call option before it expires you can gain a profit if the value of your stock option is greater than what you paid for it (stock price > buy-in price).
In our example, we could sell QQQ 332 Call Option on Feb 12 (in 2 days), giving us a 59% profit.
Exiting AFTER Expiration:
If you keep the call option until after expiration two things can happen depending on if it’s out-of-the-money or in-the-money.
Out-of-the-money means the strike price of the call option is higher than the current price of the stock (strike price > stock price). If that’s the case your call is now worth $0, so you lose all of your investment.
In our example, if we were out-of-the-money at expiration we would have seen the strategy line on the chart change from in green to red. This means the stock price changed to being less than the strike price. AI Intelligence updates Flow charts by the minutes to show the most accurate predictions.
In-the-money means the strike price of your call option is equal or less than the current price of the stock (strike price ≤ stock price). Your broker will execute the option for you, meaning it will purchase 100 shares for every call option contract you have, at the strike price. So instead of options you now hold stock.
In our example, if we were in-the-money at expiration we would have seen the strategy line either go further in the green, or stay about where it’s at currently. So the stock price either is the same as the strike price or even higher.
Options strategies are a complicated beast but to put it simple, you buy low sell high. You think the underlying stock price is lower now than it will be, so you buy when it’s low.
The complications of buying a call option lie in it’s environment. Will the stock price actually rise? If you’re selling a call option, will the stock actually fall or stay the same? How much will it fall or rise? Which strike price do I choose? Which expiration date do I choose? How do you know which call option is going to earn you money?!
If you choose the wrong call option to either buy or sell, it could mean the difference between making profit and losing. Worse, even if you’re right you may still lose money.
The market is a complicated game. What drives us at InFabric is to make options trading achievable for everyone, because damn is it worth it.
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