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Great Sites:
Index-Day-Trading
QQQQ-Market-Timing
Trading-Glossary
TradersFloor
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Why buy Call Options.
By buying call options you have the right, but
not the obligation, to purchase an underlying security. The
options can be available in various strike and expiration dates
can vary from one month out to more than a year. The one who is
buying calls believes that the market will rise. If you buy a call
option, your maximum risk is the money paid for the option. The
maximum profit depends on the rise in the price of the underlying
security. As the
price rises, the long call becomes more valuable because it gives
you the right to buy at the lower strike price. That's why
traders choose to buy a call option in a rising or bull market.
When you have call you have three options to
exit the trade:
- You can let the call expire and lose the
premium.
- You can exercise the call to receive the
stock at the strike price of the option and by selling the stock
at the current market price collect the difference.
- You can sell the call. In this case you can
make money if the price of the premium rises in value due to a
rise in the underlying stock.
Example:
A stock trades at $40, you
might buy a call option with a strike price of $44 for three month
at a price $1.
- If the stock goes to 50 in the next three
month you can exercise your call option and demand that the call
seller sell you stock for $44. You can sell the stock for a
market price $50 and keep the difference $6 (600%).
- On the other hand if the stock declines to
$35 it doesn't make sense to exercise option and buy stock for
$44. Your options would expire worthless and you would be out of
$1. in this case the seller of the call would make $1.
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| RISK STATEMENT:
The trading of stocks, futures, commodities, index futures or any other
securities has potential rewards, and it also has potential risks
involved. Trading may not be suitable for all users of this Website.
Analyst research available through this Website does not constitute a
recommendation or a solicitation any particular investor should purchase
or sell any particular securities. Past performance is not necessarily
an indication of future performance. You absolutely must make your own
decisions before acting on any information obtained from this Website.
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