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.
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 Upon exercise of a call, shares are deposited into your account and cash to pay for the shares and commission is withdrawn just like a normal stock purchase. It's important to note that exercising is not the only way to turn an options trade profitable.
For options that are "in-the-money," most investors will sell their option contracts in the market to someone else prior to expiration to collect their profits. A short call investor hopes the price of the underlying stock does not rise above the strike price. If it does, the long call investor might exercise the call and create an "assignment.
If it does, the short call investor must sell shares at the exercise price. Remember, the call is "covered" if you sell shares you already own but, if it's "uncovered," you must find shares to sell to the call purchaser. Use this educational tool to help you learn about a variety of options strategies. Discover an options trading strategy or tool that aligns with your market outlook, no matter your experience level.
Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Before trading options, please read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request. Skip to Main Content. Search fidelity. Investment Products.
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Why Fidelity. Home » Research » Learning Center ». Print Email Email. Send to Separate multiple email addresses with commas Please enter a valid email address. Your email address Please enter a valid email address. Message Optional. Next steps to consider Apply to trade options Log In Required. Options Strategy Guide. Learn more about options.
Please enter a valid e-mail address. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Call options are a type of option that increases in value when a stock rises. Call options are appealing because they can appreciate quickly on a small move up in the stock price. So that makes them a favorite with traders who are looking for a big gain. For this right, the call buyer will pay an amount of money called a premium, which the call seller will receive. Unlike stocks, which can live in perpetuity, an option will cease to exist after expiration, ending up either worthless or with some value.
One option is called a contract, and each contract represents shares of the underlying stock. Exchanges quote options prices in terms of the per-share price, not the total price you must pay to own the contract.
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Call options are in the money when the stock price is above the strike price at expiration. The call owner can exercise the option, putting up cash to buy the stock at the strike price.
What is Options Trading? | How to Trade Options | IG UK
Or the owner can simply sell the option at its fair market value to another buyer. A call owner profits when the premium paid is less than the difference between the stock price and the strike price.
If the stock price is below the strike price at expiration, then the call is out of the money and expires worthless. The call seller keeps any premium received for the option. While the option may be in the money at expiration, the trader may not have made a profit. Only above that level does the call buyer make money. When comparing in percentage terms, the stock returns 20 percent while the option returns percent. For every call bought, there is a call sold. So what are the advantages of selling a call? In short, the payoff structure is exactly the reverse for buying a call.
Call sellers expect the stock to remain flat or decline, and hope to pocket the premium without any consequences. The appeal of selling calls is that you receive a cash premium upfront and do not have to lay out anything immediately. Then you wait until the stock reaches expiration. Just ask traders who sold calls on GameStop stock back in January and lost a fortune in days.
However, there are a number of safe call-selling strategies, such as the covered call, that could be utilized to help protect the seller. The other major kind of option is called a put option, and its value increases as the stock price goes down.
Call and Put Options Defined
In this sense, puts act like the opposite of call options, though they have many similar risks and rewards:. For more, see everything you need to know about put options. While options can be risky, traders do have ways to use them sensibly. Of course, if you still want to try for a home run, options also offer you that opportunity, too.
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