A call option is a buyer’s right – but not obligation – to purchase a specific number of commodities or securities at a certain price (AKA the strike price) at a certain time.
Remember it like this: a call option means you’re “calling in” or buying an asset. You get a profit on a call option when the assets in question increases in price.
An options contract means you have the right to buy shares of a security at a certain price, which is where the super cool phrase strike price comes in, up until a specified date, which is the expiration date. Just before that date rolls around, you can either deliver the shares of stock or sell the options contract at the current market rate.
There are three main reasons that someone might want to use call options. These reasons include tax management, income generation and speculation.
Here’s a little breakdown of what happens in each of those 3 scenarios.
Call options can be used by investors to change the way their portfolios are allocated without having to actually buy or sell anything. To avoid triggering a taxable event by selling shares for a profit, you can instead use call options to reduce the security. The only cost to the shareholder, in fact, is the cost of the options contract itself.
Call options can be used to generate income through what is called a covered call strategy, which sounds like some serious spy level shit but it’s actually far more boring than that. This means you own a stock but at the same time, you are selling a call option, AKA giving someone else the right to buy it. You then collect the option premium and cross your fingers that the option will expire and become worthless. This can generate $$$ but also limits profits if the stock price suddenly rises.
Options contracts give you the chance to get to know a stock on the cheap. If said stock rises, you could see significant gains. But there’s always the chance you’ll lose it all if the call option expires worthless because the price went down. Overall, options contracts are pretty risky when used for speculation purposes.
I’m gonna totally shanghai these guys by letting them think I’m going to let the call options expire when I’m actually not going to let that happen.