In exchange for the rights conferred by the option, the option buyers have to pay the option seller a premium for carrying on the risk that comes with the obligation.
The underlying asset is the security which the option seller has the obligation to deliver to or purchase from the option holder in the event the option is exercised. The contract multiplier states the quantity of the underlying asset that needs to be delivered in the event the option is exercised.
For the writer (seller) of a call option, it represents an obligation to sell the underlying security at the strike price if the option is exercised.
Novice traders often start off trading options by buying calls, not only because of its simplicity but also due to the large ROI generated from successful trades.
A call option contract with a strike price of Rs40 expiring in a month's time is being priced at Rs2. Call option writers, also known as sellers, sell call options with the hope that they expire worthless so that they can pocket the premiums. The covered call is a popular option strategy that enables the stockowner to generate additional income from their stock holdings thru periodic selling of call options.
Naked short selling of calls is a highly risky option strategy and is not recommended for the novice trader. Call options confers the buyer the right to buy the underlying stock while Put options give him the rights to sell them. It's relation to the market value of the underlying asset affects the moneyness of the option and is a major determinant of the option's premium. The option premium depends on the strike price, volatility of the underlying, as well as the time remaining to expiration.
Once the stock option expires, the right to exercise no longer exists and the stock option becomes worthless. In the case of stock options, the underlying asset refers to the shares of a specific company.
The call option writer is paid a premium for taking on the risk associated with the obligation. Selling calls, or short call, involves more risk but can also be very profitable when done properly.
Options are also available for other types of securities such as currencies, indices and commodities.
As each call option contract covers 100 shares, the total amount you will receive from the exercise is Rs1000.Since you had paid Rs200 to purchase the call option, your net profit for the entire trade is Rs800. Option holders are said to have long positions, and writers are said to have short positions. It is also interesting to note that in this scenario, the call buying strategy's ROI of 400% is very much higher than the 25% ROI achieved if you were to purchase the stock itself.
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