Advantages and Disadvantages of Call Options
Trading call options can be an excellent way for your investment to achieve outstanding returns, provided you buy or sell them. Calling options are not always what they look like, and the purpose of this article is to explain why.
But let's start by defining a few parameters. A call option allows you to "call" in the market to sell underlying assets, such as company stock, at an agreed price before the agreed due date. Therefore, when the underlying asset does (but not always at the same rate), the value of the call option increases. You would normally think of buying a call if you believe that the underlying stock or commodity is about to increase in the short term … and sell them when you believe it is about to fall
Other types of options you can trade Called "put" and is named in this way because it allows you to "put" into the stock market the same terms as the call option
So what is the pros and cons call options
1. Leverage – Options allow you to use your investment to effectively control the wealth of the underlying asset as a fraction of the cost of purchasing the asset itself. If you hold the option expiration date (most people do not have the option selected) and it is in the money, you will receive the same benefit if you buy the option-controlled stock. Therefore, if your option contract covers 1,000 shares and their value increases by $ 5 on the expiry date, you will receive a cost of $ 5,000 minus the option
2. Flexibility – Due to the multiple option price and expiration dates, there is also the fact that you can write (create) an option position and buy an option position. Also, the option of the complex way is pricing, and you have an almost limitless possibility when it comes to setting your location. Given the right conditions, you can sometimes trade with these variables for almost "no risk" trading opportunities.
– Disadvantages of the Option Contract
Time Attenuation – The exponent rate of the option, the value of the option decaying in the last 30 days of its life, is your greatest enemy. Therefore, it is sometimes best to short the option contract, because the time decays and then works in your favor. If you are a speculative trader, buy up stocks and hope for a quick 30-100% or more profit, then you do not want to hold the phone for too long – up to a few days.
This exception is to purchase a long-term option that is "in-depth money". In this case, the option price mainly includes the intrinsic value rather than the "time" value, which gives you a more breathing space. You may also consider selling a short-term option at a higher strike price and using it in combination. If prices fall, it will reduce the total cost of long – term options, but if the price increases, it will give you a good profit
2. Complex Pricing Model – Call options pricing involves multiple components, such as intrinsic value, time value, probability, and implied volatility. You may have heard of the "Greeks" on options – delta, gamma, theta, vega and rho. These are related to the relationship between the option price and the underlying asset price movement. If you buy a call with a high "implied volatility" call and the stock price moves up as expected, your option price may not increase accordingly. In fact, if the IV portion of the option price falls, it can even remain constant or decrease. For traders, it is important to understand how "Greek currencies" affect options pricing
3. In, At, or Out Of Money – The price you choose to exercise will affect the future behavior of your call option. Off-the-money options are usually cheaper, and if the underlying price quickly exceeds the strike price, you can kill. But if it's another way, the value of your options evaporates very quickly. Similarly, the money in the phone, but in a smaller degree. Once the "intrinsic value" of the option disappears, all you leave is the "time value" – a measure of the probability that the standard will be executed at the expiry date.
So a speculative trader needs to be very strict in setting a stop in an option trade. The best practice is to set the automatic stop loss to about 20% immediately after your transaction is accepted. In this way, you will avoid any emotional temptation to ignore it and may suffer greater losses later. In this regard, the "out-of-the-money" option is not recommended because they are worth more than the ATM or ITM options fall faster
Call options are good if you know what you can do of. An aspiring trader should be familiar with the pros and cons of call options, as well as many options trading strategies designed to minimize risk and maximize profits.