A Call Option is a derivative contract that gives the buyer the right (but not the obligation) to purchase an underlying asset at a predetermined price by a certain date.
Effects of Buying a Call Option: By buying, you secure the right to purchase the asset but aren't obligated to do so. Your maximum loss is the premium you've paid. However, your profit potential is unlimited, depending on the asset's price appreciation.
Effects of Selling a Call Option: As the seller, you earn the premium but are obligated to provide the asset if the buyer chooses to exercise the option. While your profit is limited to the premium, your losses can be limitless if the asset's price significantly rises.
Let's say you purchase a call option for shares of Tata Motors at a strike price of ₹1,000, with a one-month expiration, and pay a premium of ₹100. If the share price escalates to ₹1,200 within that month, you can buy the shares at ₹1,000 and immediately sell at ₹1,200, gaining a healthy profit even after deducting the premium. However, if the price stays below ₹1,000, you might let the option expire, costing you only the ₹100 premium.
Related Articles
When does the buyer & seller of a call option benefit in the stock market?
The buyer of the call option benefits when the underlying asset's price is above the strike price at the contract's expiry. Conversely, the seller gains when the price remains below the strike price at expiry. For instance, Mr. Verma buys a call ...
What is the moneyness of an option?
Moneyness describes the relationship between the option's strike price and the current market price of the underlying asset. It helps traders gauge the potential profitability of an option. The three primary categories of moneyness are In-The-Money ...
Is the buyer of an option subjected to Physical Settlement?
In short, Yes! SEBI guidelines stipulate that all In The Money (ITM) stock options contracts undergo physical settlement, regardless of the buyer or seller status. For the Call Option Buyer: Mr. Man, a FYERS client, acquired one lot of Tata Motors ...
What is Periodic Call Auction?
Periodic call auctions are mechanisms specifically designed for trading illiquid stocks. These stocks typically experience low trading volumes, making their prices less influenced by regular supply and demand dynamics. Criteria for Illiquidity: ...
What is an options spread and what are the types of spreads?
An options spread is a strategy that involves taking multiple positions on options contracts, typically by buying and selling options of the same underlying security but with different strike prices and/or expiration dates. The main types of spreads ...