• Options Course
  • High Level Options
  • Privacy Policy
  • Terms of Use
  • Cookies
  • Financial Disclosure
How to Trade Options » EXPLAIN OPTION TRADING » Call Option Trading

Call Option Trading

Popular Call Option Trading Strategies

Call option trading is only one side of the option trading coin and therefore only completes half the picture when it comes to the possibilities with options. Nevertheless, even on its own, call option trading can be a powerful ally.

The beauty of options trading is that you can take advantage of the market whichever direction the price action goes – up or down. For net debit positions, you normally use call options if you believe the price will rise, or in some cases, remain stable … and put options if you believe the price will fall. For credit positions such as credit spreads, you do the opposite. So while our focus is on call options here, it’s important to understand that it’s only half the option trading story.

So What Is It With Call Option Trading

Call options allow the holder of the contract to buy an agreed number of an underlying financial instrument such as company stocks, for an agreed price, any time up until an agreed expiry date. At face value, it’s as simple as that. But underneath this simple concept is a whole world of mathematical formulae. Fortunately for us, computer programs do all that for us these days and we just see the numbers. As your understanding of options grows, it’s worth understanding what those numbers mean and how you can best utilise them to your advantage.

But coming back to the simple concept of call option trading… If an option contract gives you the right (but not the obligation) to purchase stock at an agreed price, then that contract will increase in value as the underlying stock price increases. For example, if you have the right to buy shares at $25 when the price is $30 then you have $5 worth of intrinsic value in the contract. Should the price continue rising to $35, the fact that you can purchase the stock at $25 and immediately sell back to the market for the current trading price of $35, means that your option contract now has at least $10 of intrinsic value.

Call Option Trading

Call option trading gives you the power of leverage.

You get to control the fortunes (or otherwise) of an agreed number of shares for much less outlay than if you had actually purchased the shares. So if the stock price moves up by $5 you receive the benefit of that $5 times the number of shares the option contracts cover. Since your outlay has been much less than if you had bought the same number of shares, your return on risk is also much greater.

Ways to Use Call Options

The most obvious way is simply to buy call options on a stock, commodity or whatever, when you believe the price will rise in the short term. Call options are rarely held to expiry date. You profit from the increased value of the options as the underlying price rises, by selling them back to the market. This is a simple concept whose main focus is simply on picking the right stocks at the right time. There are option trading courses which teach you how to do this using technical analysis of charts. It can be one of the most profitable ways to produce cashflow from the markets – but it also carries the highest risk.

Covered Calls

These are generally a very stable and low risk call option trading method. The idea is that you purchase a given number of shares, usually in multiples of 100 and then sell call options on those shares. The sold options are ‘covered’ by ownership of underlying shares. But like any option trading strategy, there are different ways to set up your trades, depending on your personal style. You can explore this most interesting area by visiting our covered calls pages.

Credit Spreads

If you believe a stock price is about to fall, you call use call option trading to create credit spread positions. You sell call options at an exercise price at, or above, the current market price of the underlying and simultaneously purchase the same number of call options at a higher exercise price. Because the lower exercise price options will be more valuable, you take in a net credit.

As long as the stock price remains below the sold option exercise price by expiry date, you achieve maximum profit.

Debit Spreads

These work in reverse to credit spreads. You enter debit spreads when you believe the underlying price will rise. So you buy call options at an exercise price at, or above, the current market price of the underlying and simultaneously sell the same number of call options at a higher exercise price, for a net debit or cost. You achieve maximum profit if the underlying market price is above the sold exercise price at option expiry date.

For more information about these and other call option trading strategies, visit our page on debit spreads, or go to our option spread trading page and drill down.

Call option trading can also be adapted to more exotic option trading strategies such as calendar spreads and long condors. In the end, it all comes back to the simple principle that call options increase in value as the underlying financial instrument rises in price. After that, it’s just a matter of whether you are on the buying or selling end of an option contract, or a combination of both, as to what your risk and potential reward profile will look like.

You Might Also Like

  • Share Buybacks May Be a Signal for Call OptionsShare Buybacks May Be a Signal for Call Options
  • Want To Make Money In Gold?Want To Make Money In Gold?
  • Bottom Fishing Stock Strategy – ExampleBottom Fishing Stock Strategy – Example
  • Renting SharesRenting Shares

Filed Under: EXPLAIN OPTION TRADING Tagged With: best way to trade call options, call options explained, call options trading, explain call options, how to trade call options, trading call options, what are call options

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Search for Anything Here

Main Pages

  • Home
  • Options Basics
  • Covered Calls Options
  • Advanced Strategies
  • Option Spread Trading
  • Stock Option Trading
  • Index Options
  • Stock Chart Analysis
  • Forex Options Trading
  • Options Trading Software
  • Option Trading Systems
  • Commodity Futures Options
  • Options Broker Reviews
  • Glossary of Options Trading Terms
  • Financial Disclosure

Latest Articles

  • Investing Basics – Diversify Your Portfolio to Make Money
  • Want Trading Success? Avoid These Four Trading Mistakes
  • Technical Analysis of Stock Charts
  • The Calendar Straddle Option Strategy
  • Candlestick Chart Patterns Explained
  • Bottom Fishing Stocks Using Inflated Option Prices
  • Bottom Fishing Stock Strategy – Example
  • Comparing the Bear Call Calendar Spread with the Traditional Bear Call Spread
  • Is Binary Options a Scam if you Have a System?
  • Call Calendar Spread Example
  • Options Trading Education and Training
  • The Call Calendar Spread Explained
  • The Three Legged Box Options Trade
  • Near Riskless Trading Strategies
  • Is Binary Options a Scam? Read This and Decide
  • Gold ETF Investing – 10 Facts You Should Know
  • How to Profit Like a Pro Trader
  • Earnings Report Definition
  • Jamie McIntyre and the 21st Century Academy
  • You Can! Be a Successful Options Trader


options trading pro system

Save

Home   |   Site Map   |   Privacy Policy   |   Terms of Use   |   Amazon Affiliate   
Copyright © 2002- Option Trading Fortune. ALL RIGHTS RESERVED.

Page copy protected against web site content infringement by Copyscape


DISCLAIMER: All stock options trading and technical analysis information on this website is for educational purposes only. While it is believed to be accurate, it should not be considered solely reliable for use in making actual investment decisions. This is neither a solicitation nor an offer to Buy/Sell futures or options. Futures and options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this video or on this website. Please read "Characteristics and Risks of Standardized Options" before investing in options. CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.