Call option
Call option is (right to buy) and this option is exercise
when the exercise price is lower than future market price. Call option is used
in increasing price situation i.e. you can call (buy) share at exercise price
and then sell at high market price. Therefore call option is exercised when
exercise price is lower than market price. Call option provides you with
unlimited upward gain and limited downward loss i.e. (Premium amount).
Example of put option
|
Call option
|
1000
Shares
|
|
Call option
Premium
|
$ 300
|
|
Exercise Price
|
$ 5
|
|
Current Price
|
$ 6
|
|
Future market
Price
|
$ 7
|
Solution
Call option (Right to buy) is used when you expecting future
down fall of prices.
|
Call option - Buying Expenses (1000 x 5)
|
$ 5,000
|
|
Premium Expense
|
$ 300
|
|
Open market Sales
(1000x7)
|
$ 7,000
|
|
Profit after premium
( 7,000 - 5,000- 300)
|
$ 1,700
|
