📱 Who's Calling? A definitive guide to call options.

You may heard of heard of people on Twitter or Reddit trading options, most likely they were trading call options.

What is a call option and how does it work?

The most popular is the long (means you buy) call option. This option give you (the buyer) the right (aka the option, hence why they are called options) but not to obligation to buy 100 shares of a stock at a set price on set date.

A call is basically a bet that you think a stock's price will increase.

But Tristan, what if I don't have enough money to buy 100 shares of Apple?

That's fine.

You can always sell your call option to someone else before the expiration date. In the example above, you bought the option at $1.88. 

Now, let's say that a few days after you bought your call the price of Apple stock goes up to $138. Barring other effects, in most cases, the price of the call itself has also increased. 

Now, instead the call costing $1.88, it costs $2.20. 

What would do here? 

• Wait until expiration and hope that Apple stock in $140 or higher?

• Sell your call option for $2.20 when it cost you $1.88?

I would pick choice two. And remember from before, how many shares does a call option allow you to buy?

100 shares.

So, your profit is ($2.20-$1.88) * 100 = $32.00 and because you only paid $188 (1.88 *100) for the call, your profit margin is 17%.

If you just bought 100 share of Apple stock instead of the call option, you would have had to layout $13,595 for the same starting point. And most cases, Apple stock is not going up 17% in a few days to a few months.

This power is called leverage. And it what gives options the ability create a lot of money, but also gives options the ability to destroy a lot of money.

So be careful. You never know who's calling you.

If you want to learn more about options or how to study for finance exams, schedule a call with me so you can ace your exam!