A call option gives the investor the option to buy the security at the strike price before the contract expires. For example, if the strike price for the security is $50 – but the stock is trading for $100 – the investor can buy it for $50 by exercising the option.
A call premium is the price of a call option. The size and presence of a call premium can determine whether an investor makes money on an options trade.
How Does Out of the Money (OTM) Work? Let’s assume IBM (NYSE:IBM) stock trades at $100 and an investor purchases a call option contract on IBM at a $102 strike price. If IBM closes below $102 on the contract expiration date, the option expires out of the money. The option is worthless since the option buyer would lose money by exercising the option. Likewise for a put option, assuming IBM ...
How Does a Stock Option Work? All options are derivative instruments, meaning that their prices are derived from the price of another security. More specifically, options prices are derived from the price of an underlying stock. For example, let's say you purchase a call option on shares of Intel (Nasdaq: INTC) with a strike price of $40 and an expiration date of April 16. This option gives ...
A call option written against stock you don't own is called a naked call. In the long run, because options tend to lose their value as they approach their expiration date, selling options tends to be much more profitable than buying options.
