Call Options Tips

When to Buy Calls

Buying a call option gives the owner the right to buy a share at a specified price. The share's market price must move above a certain point to be used. If the share price never moves "into the money" during the contract period, the option becomes worthless. A call option of a company's shares costs significantly less than buying the shares themselves. As a result, options can be used to leverage small investments into large gains. Buying a call is best used when an investor expects a the price of a particular stock to rise significantly in the near future.

When an investor sells a call, he promises to sell a share at a specified price regardless of how high the share is selling on the market. This is a strategy best used when an investor believes a stock's price will remain constant or will drop. It gives the investor an immediate cash gain of the purchase price of the option. The downside of selling a call is that the potential loss is limitless. The higher the share price rises, the greater the loss to the seller.

Call options are risky investments. An investor should consider her tolerance for market risk and losing money before looking into options. Some investments inevitably go badly and lose money. An investor who buys shares of a company that drop in price can salvage some of her investment by selling these shares. However, this same purchase in call options loses the entire investment. A poorly chosen sale of call options can potentially bankrupt an investor. As a result, it's very important to make sure that you can tolerate market losses before investing in call options.

The trading of options and other derivatives is a difficult market to value, even for professional investors. Despite being one of the simpler derivatives traded, call options still require advanced financial knowledge to be used properly. As a result, you should consider seeking the advice of a financial adviser before buying or selling calls. If you feel confident in your ability to invest in options, make sure to balance out their riskiness in your portfolio with other guaranteed investments like bonds or government securities.