Call Option Review

Hello fellow option traders:

CALL OPTION: An option that gives the right not the obligation to a buyer to buy the underlying stock contract at the strike price.


Strike price

As long as the market price is above the option strike price, the call option contract is said to be "in the money". On the expiration date, if the price of the stock is below the strike price, then the call option expires worthless. In the case of call options, it is the market value of the underlying stock minus the strike price. A call option for which the strike price is equal to the stock price is said to be an "at the money" call option. If the strike price is above the stock price, the call option is said to be an "out of the money" call option. This is because the lowest the call option can go is zero. In answering this question, the first thing to note is that the prices of call options vary depending upon the strike price. The lower the strike price, the more expensive the call option. This makes sense because a call option gives the holder the right to acquire the underlying futures contract at the strike price. The breakeven is calculated by adding the strike price to the premium of the call option.

The call option price can go to zero as the asset price falls way below the strike price. Don't be tempted by inexpensive call options having a very high strike price. Thus, purchasing a call option requires two immediate decisions: you have to decide on the strike price and the expiration month. If the underlying stock price does not move above the strike price before the option expiration date, the call option will expire worthless.