Call options in stock market

For every buyer of an option, there's a corresponding seller. Different option users may be employing different strategies, or perhaps they're flat-out gambling. But you probably don't really care -- all you're interested in is how to use them appropriately in your own portfolio. Next up : How options are quoted, and how the mechanics behind the scenes work. Check out more in this series on options here.

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Buying Call Options

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Fool Podcasts. New Ventures. Options are more advanced tools that can help investors limit risk, increase income, and plan ahead. A call option is a contract between a buyer and a seller to purchase a certain stock at a certain price up until a defined expiration date. The buyer of a call has the right, not the obligation, to exercise the call and purchase the stocks. On the other hand, the seller of the call has the obligation and not the right to deliver the stock if assigned by the buyer.

But all that fun isn't free. These examples do not include any commissions or fees that may be incurred, as well as tax implications. A "long call" is a purchased call option with an open right to buy shares. The buyer with the "long call position" paid for the right to buy shares in the underlying stock at the strike price and costs a fraction of the underlying stock price and has upside potential value if the stock price of the underlying stock increases.

A long call can be used for speculation. For example, take companies that have product launches occurring around the same time every year.

What is an Option? Put and Call Option Explained

You could speculate by purchasing a call if you think the stock price will appreciate after the launch. A long call can also help you plan ahead. For example, you may have an upcoming bonus that you would like to invest in a stock today, but what if it didn't pay out until the following month? To plan ahead and lock in the price of the stock today, you could purchase a long call with the intent to exercise your right to purchase the shares once you receive your bonus. A "short call" is the open obligation to sell shares. The seller of a call with the "short call position" received payment for the call but is obligated to sell shares of the underlying stock at the strike price of the call until the expiration date.

Put and call options

A short call is used to create income: The investor earns the premium but has upside risk if the underlying stock price rises above the strike price. Both new and seasoned investors will use short calls to boost their income but, more often than not, do so when the call is "covered. An "uncovered" call carries significantly more risk and a potential for unlimited losses because you are obligated to find shares to sell to the call purchaser.

A long call investor hopes the price of the underlying stock rises above the exercise price because only at that point does it make sense to exercise a call. Upon exercise of a call, shares are deposited into your account and cash to pay for the shares and commission is withdrawn just like a normal stock purchase.

American call options

It's important to note that exercising is not the only way to turn an options trade profitable. New Customer?

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