What is a call option?

Call option is a type of financial instrument known as a derivative. In principle, it is an agreement between two parties to exchange shares for a agreed price in a certain period of time. The replacement of the shares is optional and the owner will decide whether this will happen.

The agreed price of the stock exchange is called a strike price. The date on which the agreement expires is the expiration date of the call option. The amount of money needed to buy this option is called a premium. If there is an exchange, then it is said that he has applied the possibility of calling. Call options are always an agreement that you can buy shares at agreed prices. They come in European style and American style. The main difference between the two is that European options can only be applied on the day of expiry, so far, American style can be performed at any time during their lives.

call options are often described by the relation of strike price to the price of actionand. One for which the strike price equals the price of shares is said to be for money. If the strike is over the price of shares over the price of shares, it is reported to be out of money. Finally, if the strike price is lower than the stock price, it is reportedly in money.

There are two investment styles in investing in these derivatives. Conservative investors sell from the possibility of calling money to stocks that are part of their portfolio to increase the overall return on their portfolio. The intention is that the price of the shares does not increase at such a rate that it is equal or larger than the strike price. In this case, the investor gets to maintain the bonus and stocks and the possibility to expire Worthless. The process is then repeated.

Speculative investor will buy for cash call options without owning basic shares. The option price is expected to increase with increasing the price of shares. Usually, if the stock price increases by one US dollar (USD), the price of the option will also increase by USD. Because the Call may costOnly one tenth of shares is the rate of return on investment much higher than it would be if the stock were purchased.

For example, if the stock costs $ 10, then the call for this event for $ 10 could stand $ 1. If the stocks increase prices to $ 11, the purchase of shares is $ 1 and equal to 10% of the yield; However, there is also $ 1 and only $ 1 invested, a 100% return is implemented. However, if the price should fall to $ 9.50, the possibility would become worthless and an investment of $ 1 would be lost, while only $ 0.50 would be lost when purchasing stocks. With the lever effect, this type of derivative provides that the profits are enlarged, but the losses are also. The owner of the shares would also receive any dividends paid, while the owner of the call option would not.