Call options are one of the most popular options trading strategies. This may because they’re considered one of the simplest ways to trade options, and can be very profitable for the successful trader.
So, what are call options? Call options are a contract where the holder (aka “buyer”) has the right (but not the obligation) to a buy a specific quantity of a security at a certain price, within a certain amount of time. On the other side, the writer (aka “seller”) of a call option has the obligation to sell the security at the strike price (if the holder decides to buy).
For example, if a holder bought a call option on Apple (APPL) with a strike price of $50 per share, expiring in two months, they would have the right to exercise that option and receive the shares. The writer would have the obligation to sell them at $50 per share.
As a side note, just as calls are the right to buy, puts are the inverse: the right to sell.
What Are Call Options Advantages?
- Covered calls (when the call option writer owns the underlying security) can be a good way to generate additional income on existing stock positions.
- They can be used as a type of hedge or insurance to protect gains or limit losses when a stock looks shaky.
- They can be a good way to generate quick profits.
What Are Call Options Disadvantages?
- Selling call options involves risk (but can be very profitable when successful).
- Uncovered calls (aka “naked calls”) can be especially risky, and are not recommended for novices. This is when the trader writes calls without owning the underlying security.
For those thinking about trading options, Chaikin Analytics offers the tools and resources to get started.