Long Call Options
Calls are a bullish strategy used by aggressive investors. It has a low risk and unlimited
upside potential.
How it works: Instead of purchasing stock, which is costly and puts all your investment at risk,
a call option allows the investor to control blocks of stock at a lower cost and limits the risk.
Options are sold as contracts; one contract controls 100 shares of stock. A call gives you the
right, but not the obligation, to purchase shares at a set cost before a specific day, know the
expiration date.
Example: You are bullish about a stock trading at $90. Instead of buying 100 shares of stock and
spending $9,000, you can buy one contract of the call option for $7 a share, a cost of $700. If
the stock price moves up, the option price will also increase. If the stock increases to $110,
the option's worth will increase to $20, meaning the contract would now be worth $2,000 or a 186
percent return.
If the price falls, your options may expire worthless, giving you a $700 loss. In contrast, a
stockholder would face a larger dollar loss.
The payoff: You are profitable if the stock price goes up.
The drawback: Unlike stocks, there's a time element in dealing with options. They have an
expiration date and can expire worthless.
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