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Call Options

Call Option

What is Call Option ?

Call Option is an option where buyer gets the right to purchase the underlying but not any obligation. Buyer of the Call Option expects the price to go up and hence purchase right to buy at a specified rate by paying premium. Call Option buyer is getting the right to purchase from Call Option seller and pays the premium to Call Option seller. The Maximum loss to the buyer of the Option is limited up to premium paid. If price rises than Call buyer earns unlimited profit. The maximum profit to the Call seller is up to premium received when market falls and he may make unlimited loss if market rises.

Pay off of Call Buyer

Mr. X has purchased the Nifty 24 June 2013, 5000 Call Option at Rs.200.
Here, Underlying is Nifty. || Strike Price is 5000. || option is Call Option (Right to Purchase). || Maturity (Expiry) is 24 June 2013. || Premium is Rs.200.
So when spot price goes up above 5000, Mr. X will exercise his right to purchase Nifty at 5000. So he will get benefit when market rises above 5000. So if market goes up to 5100 he will get Rs.100 back but as he has paid Rs.200 as premium so his net loss would be Rs.100.
Now when market moves the payoff of buyer is as follows:

Pay off for Call Buyer

Spot Price Payoff
4700 -200
4800 -200
4900 -200
Spot Price Payoff
5000 -200
5100 -100
5200 0
Spot Price Payoff
5300 100
5400 200
5500 300

Break Even Point for Call Options

BEP is a point when Options seller and buyer arrive at no profit and no loss situation. It is the price where trader is neither earning nor losing any money. Here, both buyer and seller remain at cost to cost.
For Call Option BEP = Strike price + premium.
In above both example, 5000 + 200 = 5200. (Strike + Premium)
That means, when spot reaches 5200, Mr. X neither earns nor loses any money.

When to buy Call Options​​​​

How to decide Strike Price when trading Long Call

Greek Behaviour for Long Call​​​​​

Pay off of Call Seller

Now suppose Mr. X has sold the above option. Now his maximum profit is up to premium he received and his loss is unlimited. Now when market moves the payoff of seller is as follows:

Pay off of Call Seller

Spot Price Payoff
4700 200
4800 200
4900 200
Spot Price Payoff
5000 200
5100 100
5200 0
Spot Price Payoff
5300 -100
5400 -200
5500 -300

When to Sell Call Options

Greek Behaviour for Short Call

Benefit of Call Option

The Call Options gives us the Right to Purchase and not any obligations. It indirectly promotes the probability of unlimited profits against risk of limited losses. There are lot of Benefits of Call Options Trading :

  • Call Buy carries limited loss Profile.
  • Call Buy provides Unlimited Profit Profile.
  • Call Buy requires investment of Premium only. So it is having less investment requirement.
  • Investor can earn time value by selling Call Options.
  • Call Spreads i.e. Bull Call Spread and Bear Call Spread can earn money if your view goes correct and simultaneously incurs small losses if your view goes wrong.
  • During high Volatility, it becomes difficult to keep stop losses in Futures while Call Option gives us the surety of Max loss figure without keeping any Stop losses.