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Buying Call
Options.
By buying call options you have the right, but not the
obligation, to purchase an underlying security. The options can be
available in various strike and expiration dates can vary from one month
out to more than a year. The one who is buying calls believes that the
market will rise. If you buy a call option, your maximum risk is the
money paid for the option. The maximum profit depends on the rise in the
price of the underlying security.
As the price rises, the long call becomes more valuable
because it gives you the right to buy at the lower strike price. That's
why traders choose to buy a call option in a rising or bull market.
When you have call you have three options to exit the
trade:
- You can let the call expire and lose the premium.
- You can exercise the call to receive the stock at
the strike price of the option and by selling the stock at the current
market price collect the difference.
- You can sell the call. In this case you can make
money if the price of the premium rises in value due to a rise in the
underlying stock.
Example:
A stock trades at $40, you might
buy a call option with a strike price of $44 for three month at a price
$1.
- If the stock goes to 50 in the next three month you
can exercise your call option and demand that the call seller sell you
stock for $44. You can sell the stock for a market price $50 and keep
the difference $6 (600%).
- On the other hand if the stock declines to $35 it
doesn't make sense to exercise option and buy stock for $44. Your
options would expire worthless and you would be out of $1. in this
case the seller of the call would make $1.
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QQQQ Options Trading
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