Call Options

The concept of leverage is the cornerstone for the development of options as an investment vehicle. For example, to acquire 100 shares that are being sold at 30 dollars each would cost you 3,000 dollars; now well, on the other hand, with these 3,000 dollars you would have the possibility of acquiring 10 call options sold at 300 dollars each. These options would permit you to acquire 1,000 shares during a determined period of time (generally of three to nine months, but for very active shares there could be options for each coming months) at a specific price per share (usually the price of the shares at the moment you have acquired the call options).

Before launching yourself to buy call options you have to be conscious, that, if you haven’t exercised the option before the specified date as put in the contract (called the expiration date). The contract will loose its value and you will loose the money invested in the operation.

This is why the options are also called “perishable assets”. When you buy an option you are betting on your prediction of the rising or falling of the share prices during the time specified on the contract.

This principle favors the investor that uses a conservative strategy called “covered sale of a call option”. This strategy consists in having a determined number of shares and to simultaneously sell the call option over these same shares.

In the case of shares that don’t generate many profits or dividends along the year, this can be the method to increase your cash flow.

Frequently you acquire put options to count with an insurance against the falling of quotations. The long-term options (called leaps and that could be of up to two years) are another alternative.

Above all that has been said, the options can also be used to create artificial share positions, which would permit the investor to control a great position by using leverage.

The options are negotiated on the Chicago board of options exchange (CBOE) as in the main stock exchange markets; this makes the options to be among in the main stock exchange markets; this makes the option to be among the most important investment tools that have greater liquidity. Depending on the kind of strategy adopted by the investor. The investment in option may imply a high grade of risk. Although well managed they can be very useful, before using them as investment tools you should take your time to know their working mechanism and their fundamental strategies.

Most of the stock exchange agencies require of a separate contract to trade with options. The investor should have a pamphlet published by the CBUE that is named “risks and characteristics of standard options”; in this pamphlet they explain the basic concepts and trading risks of options.