Call Stock Options or Call Options, the right to buy 100 stocks, is designed to make money when the underlying instrument (stock) go up in value.
Also, it can lose money when the stock goes down.
The easiest way to explain the way a call option work is to relate it to the real estate market.
Most people are familiar with it they should not have any problem.
Say if you want to invest in a $500,000 piece of real estate for capital gain, (expecting the price of home will go up, says 10% in the next one year), there are 2 ways you can purchase it.
One is pay in full - $500,000, another only 5% of the price - $25,000 for right to buy the home one year from now.
Suppose that you are right and one year later, the value of that home went up 10% and now value at $550,000.
If you paid in full $500,000, your return on investment is only 10% - $50,000.
However, if you paid only $25,000, your return would have been 200%.
That's exactly how a call option works in the stock market but you have more choices of when to purchase the stocks.
However, in case of a real estate market crash and the value of that home went from $500,000 to $100,000, you have the right to walk away from that Call Option, accepting a loss of $25,000.
You don't have an obligation to buy that home and suffer a 80% loss in value.
A Call option give you right to buy the stocks at certain price but not obligation to buy it in case the stock go south.
Also, it can lose money when the stock goes down.
The easiest way to explain the way a call option work is to relate it to the real estate market.
Most people are familiar with it they should not have any problem.
Say if you want to invest in a $500,000 piece of real estate for capital gain, (expecting the price of home will go up, says 10% in the next one year), there are 2 ways you can purchase it.
One is pay in full - $500,000, another only 5% of the price - $25,000 for right to buy the home one year from now.
Suppose that you are right and one year later, the value of that home went up 10% and now value at $550,000.
If you paid in full $500,000, your return on investment is only 10% - $50,000.
However, if you paid only $25,000, your return would have been 200%.
That's exactly how a call option works in the stock market but you have more choices of when to purchase the stocks.
However, in case of a real estate market crash and the value of that home went from $500,000 to $100,000, you have the right to walk away from that Call Option, accepting a loss of $25,000.
You don't have an obligation to buy that home and suffer a 80% loss in value.
A Call option give you right to buy the stocks at certain price but not obligation to buy it in case the stock go south.