When you learn the basics of options trading, the terms "call" and "put" are sometimes the first ones you come across. Call and put options can be bought and sold (or written) on a variety of different underlyings. In this article we will talk in more detail about the rights and obligations that come with the Call options trading associated with it, as well as about various possible uses for private traders.
What is a call option?
A call option (short: call) is a call option. Through the Purchase of a call option (long call), you receive the right to buy the underlying (e.g. share, future, ETF) at the strike price (also: exercise price or strike). Depending on the exercise style of the option (American-style option or European-style option), you can exercise this right during the entire term of the option or only on the expiration date.
Through the Sale of a call option (Short Call), you are the counterparty of the option buyer and are obliged to comply with the option buyer's demand if he exercises his right to purchase the underlying. In this case, you must sell the underlying. If you hold a long position of the underlying in your securities account, the corresponding quantity will be sold. Otherwise, you will be booked into a short position.
As the buyer of a call, you pay the option seller (also called the writer) the price of the option, the so-called Option premium. As a seller of a call option, you will be credited for this immediately.
How does a profit or loss occur when trading calls?
As Call option buyer you pay the option premium. You must now first "compensate" this again in order to make a profit. The profit of a purchased call option on the expiration date is calculated from the difference between the price of the underlying and the strike price of the option (taking into account the multiplier), less the option premium paid. For concrete examples, please refer to the following section (Possible uses of calls).
The option premium represents the maximum possible loss of the option buyer, and at the same time the maximum profit of the option seller.
Options can be traded on each trading day. Thus, a trade can be terminated prematurely by repurchasing or selling the option.
Possible applications of calls
For speculative purposes, you can bet on rising prices of the underlying by buying call options, or you can earn a revenue (option premium) by selling call options.
Long Call
Through the Purchase of a call option (long call), you profit if the underlying rises after the purchase of the option. However, the price increase must more than compensate for the option premium paid in order to actually generate a profit. In addition, the option must be "in the money" at expiration, i.e. the underlying must be quoted above the strike of the option. Otherwise, the option would expire worthless.
If a call option expires In The Money, the profit can be calculated as follows:
Profit = (price of the underlying - strike price (strike) of the option) * multiplier of the option - option premium paid.
(You can find the multiplier of the option in the contract details of the option. In TWS, for example, double-click on any strike of an option in the option chain).
Example
You pay an option premium of EUR 250 for a stock option with a strike of EUR 110. At the expiration date, the share is quoted at EUR 120. (Note: The multiplier of stock options is 100. One option refers to 100 shares) The profit is:
Profit = (120 EUR - 110 EUR) * 100 - 250 EUR = 1000 EUR - 250 EUR = 750 EUR
Short Call
Through the Sale of a call option you get the Option premium. This defines your maximum profit, which arises when the underlying on the expiration date At The Money or Out Of The Money closes (i.e. the price of the underlying is not quoted above the strike of the option)
A loss is incurred if, on the expiration date, the underlying In The Money closes, and the resulting loss is greater than the option premium collected.
Since the underlying can theoretically rise indefinitely, a strict Risk and money management indispensable. (A loss can be limited by buying back the option early or by buying a call with the same maturity and with a higher strike than the strike of the sold option. The latter is called a "bear call spread").
Example
The Crude oil futures (symbol CL) is quoted at a price of USD 50. You assume that the price of crude oil will tend to move sideways or downwards in the next two months and therefore sell an option on crude oil with a strike at 60 USD and a remaining term of 60 days. In return, you receive an option premium of 400 USD.
You keep the option premium in any case, regardless of where the oil price is quoted on the expiration date or during the term of the option. If the oil price does not exceed 60 USD on the expiration date, you will make a profit of 400 USD.
If the oil future rises above 60 USD, you are obligated to deliver the future to the option buyer at 60 USD on the expiration date.
If, for example, the future is quoted at 62 USD, you will receive a short position in the future, which you can immediately buy back. (Note: The multiplier of the CL options is 1000. One option refers to one future. One future refers to 1000 barrels of Light Sweet Crude Oil) The loss is:
Loss = (62 USD - 60 USD) * 1000 - Option premium = 2000 USD - 400 USD = 1600 USD