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Call Options Trading

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James Barra

Written By

James Barra

James is an investment writer with a background in financial services. As a former management consultant, he has worked on major operational transformation programmes at prominent European banks. James authors, edits and fact-checks content for a series of investing websites.

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Jemma Grist

Edited By

Jemma Grist

Jemma is a writer, editor and fact-checker focused on retail trading and investing. Jemma brings a unique perspective to the forex, stock, and cryptocurrency markets and works across several investment websites as a researcher and broker analyst.

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Fact Checked By

William Berg

Fact Checked By

William Berg

William contributes to several investment websites, leveraging his experience as a consultant for IPOs in the Nordic market and background providing localization for forex trading software. William has worked as a writer and fact-checker for a long row of financial publications.

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Updated

Jul 2, 2024

Call options trading is a way to speculate on popular financial markets. Call buyers have the right to control shares they don’t own without the capital typically required to purchase a stock. The investment vehicle also offers an opportunity to leverage capital for greater returns. See our guide to call options trading with examples explained, strategies detailed, and their respective merits and drawbacks listed.

What Is A Call Option?

A call option is a financial contract between two parties to exchange an instrument at an agreed strike price on or before a set date. The instrument is based on an underlying asset, such as a stock, bond, commodity or crypto.

A call option gives you the right, but not the obligation, to buy the underlying asset at the agreed price and time. The seller is obliged to sell the underlying asset at the strike price should the buyer choose to exercise their option. A call option buyer pays a fee, otherwise known as a premium, for the right. Profits are earned if the underlying asset’s market value increases.

On the other hand, a put option gives the owner the right, but not the obligation, to sell the underlying asset at a strike price by a predetermined date. Here, the put buyer can earn a profit when the underlying asset’s value decreases.

As a derivative, options trading can be used to hedge a position, speculate on the movement of an underlying asset, or to provide leverage to holdings.

How Call Options Trading Works

A buyer will be presented with an options chain, which lists all available options contracts for that asset. Details on an options chain typically include the premium, strike price, expiration date and trading volume. One option generally represents a call block of 100 shares of the underlying stock. However, option prices are quoted per share. So the total price you pay would be the quoted premium x 100.

The buyer has the option to choose how long the contract is, though longer contracts are more expensive due to time value. The buyer has the right to exercise his option on or before the date of expiration. If you hold the option until the point of expiry, there are generally two potential outcomes:

1. Call options that have a strike price above the stock price at the expiration date are considered ‘out of the money’. These are worthless and will simply expire. The buyer will forego his options and will only make a loss from the premium initially paid to the seller.
2. If the strike price is below the stock price at the expiration date, it is considered ‘in the money’. The buyer can exercise the option to buy the shares at the strike price and the seller will be obliged to sell.

While a call options trading transaction takes place between two parties, a brokerage or retail trading platform typically facilitates the exchange. Call options trading is available on desktop devices and mobile apps at popular online brokers, including IG, Robinhood and Zerodha.

Options trading hours typically run from 09:30 am to 4:00 pm EST and are particularly popular in America. They are also popular in other countries. For example, in Australia, options trading generally takes place on the Australian Securities Exchange (ASX) while in the UK, though less popular, call options products are available on the FTSE.

Example

Let’s suppose an investor owns 100 shares of stock. At that point in time, the stock is trading at $50 per share. However, they want to make an income on top of any dividends received from the stock. The investor also predicts that the shares are not likely to rise above $65 per share over the next month.

A call options chain shows that there is a $65 quoted option trading at $0.20 per share with expiration in one month. The investor decides to sell the option and immediately receives a $20 premium ($0.20 x 100) into their account. Call sellers expect a stock to remain flat or decline, where they can earn the premium, keep the shares and still earn the dividends.

Now let’s look at a buyer’s perspective. A call buyer will want to take advantage of a stock’s gain above the strike price on or before the expiration date. As a call buyer, you expect the price of the stock to rise before the expiration date. Again, the stock is trading at $50 per share at that time. You choose to buy a call on the stock with a $55 strike price for a $20 premium, which expires in a month. On the expiration date, the stock rises above the strike price at $65 per share and the buyer exercises their option. The call seller then has the obligation to sell the 100 shares at the strike price, and the buyer makes a profit.

Pros Of Call Options Trading

• Cost-effective – Call options trading requires less upfront capital than traditional stock investing. This gives you leveraging power as you can hold the same position as you would with the stock but only pay a small premium. Even if the stock price closes below the strike price, the call buyer would only lose out on the premium.
• Potential returns – When used effectively, the returns from call options trading can be higher than buying shares with cash.
• Risk – Call options trading is arguably less risky as it doesn’t require the same financial commitment. Call options are typically deployed to hedge positions and are more secure than stocks.
• Strategy alternatives – Trading call options offers flexibility. Users have another investment vehicle to generate returns.

Cons Of Call Options Trading

• Liquidity – Some stock options may be less liquid, which makes identifying entry and exit points more difficult. Illiquid options can have low or no open interest, which may force the call buyer to hold the contract until the expiry date.
• Time-sensitive – A call buyer may choose to purchase an options contract as they don’t have the cash upfront to pay for the shares. However, they must be able to provide this capital by the expiration date on top of the cost of the premium.
• Long-term returns – Trading call options is typically a short-term technique. The buyer has to act by a deadline, even if the stock price does not reach the desired level. While options investors look to capitalise on near-term price movements, long-term stock investors can wait years for their stock to appreciate.
• Availability – Call options trading is not as ubiquitous as other popular forms of trading, such as forex investing. Fewer brokers and trading platforms offer call options trading.

How To Start Call Options Trading

We’ve listed some popular call options trading strategies below.

1. Long Call

Bullish traders who are confident that a stock price will rise are likely to prefer the long call options trading strategy. This technique involves buying call options and waiting to see whether the share price rises above the strike price before the expiry. The risks with this strategy are mainly limited to the cost of the premium. Note, you can find user-friendly long call trading calculators online.

2. Covered Call

This strategy allows traders to maximise the profit potential of stocks already in their portfolio. Traders who take this position usually expect that the underlying asset won’t change or slightly increase in price. Covered call options sell the rights of a stock owner to someone else in exchange for cash. By selling a call option, they collect the premium for those shares, while benefiting from a rise in stock price. The risks involve the obligation to give up their shares, should the buyer exercise the option. Most brokers ensure the risks are explained before you purchase.

3. Intraday

Investors can also explore day trading call options. Here, call options traders usually open a position at the start of the day and close it by the end of the trading session. Intraday options traders will be particularly focussed on short-term volume and volatility. Their profits depend on price fluctuations that day with reduced liquidity cutting into profits.

4. Short Call Spread

A short call spread or bear call spread involves purchasing call options at a high strike price and then selling an equal number of call options at the same expiration date at a much lower strike price. Investors who employ this call options trading strategy expect the stock to move sideways or decline slightly. However it’s worth noting that this offers limited rewards and conservative profits.

5. Call Spread

This is also known as the bull call spread strategy. This involves purchasing call options at a specific strike price and expiration date. Investors will then simultaneously sell the same number of call options at the same expiration date at a higher strike price. The purpose of this strategy is to sell call options at a higher strike price to reduce the total cost of the trade. However, gains can be limited due to the net cost of the premiums for all call options. On the other hand, a put spread involves buying a put on a strike and selling another put for a lower strike price with the same expiry date.

6. Long Straddle

A long straddle strategy is where an investor buys a call and put option simultaneously. Both call and put options should have the same strike price and expiration date. Investors who choose this strategy seek to profit from bullish price movements on a stock that they already own.

Final Word On Call Options Trading

Call options trading provides the right to control an underlying asset without the need to own it or to have the cash to pay for it upfront. This opens up opportunities for traders to earn profits through various strategies. Use our beginners guide for call options trading above and check out our list of the best brokers.

FAQ

What Is A Covered Call Strategy In Options Trading?

A covered call strategy involves holding a long position in a stock and then selling, or writing, call options on that asset. The strategy is used by investors who believe stock prices aren’t likely to rise in the near term. They can gain profit from the premium charged to call buyers.

What Is Call Options Trading?

Call options trading relates to a financial contract between two parties. The call buyer pays a premium to the call seller for the right, but not the obligation, to buy an underlying asset by a specific expiration date for a set strike price.

Can You Do Call Options Trading On Trading 212?

As it stands, Trading 212 does not offer call options trading. Users on the Trading 212 community forum have called for the platform to introduce the product, but the broker is yet to change its offering in light of this.

Does Call Options Trading Have Margin Calls?

Some option positions don’t require margins, thus do not have margin calls. For example, positions on a long call strategy, covered calls, or covered puts. This is because the option to own the underlying stock serves as collateral.

Can You Exercise A Call Option Before The Expiration Date?

Early exercise is only possible on American-style options contracts, where the holder can exercise it at any point until the expiry. European-style options contracts only allow the holder to exercise this right on the expiration date.