WHAT ARE
CALL OPTIONS?

Different options can help you build out your portfolio in different ways.

eToro options has both bullish options and bearish options.

Well, this video is for the optimists – the bulls. 

So, what are call options?

They’re contracts that give the owner the right to buy 100 shares of a stock or ETF at a certain price called the strike price.

And they only let you do that for some time – they have an expiration date.

So, why would anyone buy a call option?

One speculative strategy would be to buy it because you expect the stock to go up before the option expires.

So, how would that play out? 

Well, understanding how options prices change is complicated, but we wanted to give you a simple blueprint for how they work.

Good news: there’s generally only four possible outcomes and understanding these will help simplify how call options work.

Situation 1: Profit.

You win – to profit the stock price needs to move above the strike price of your option at expiration.

And not just above; above by even more than the cost of the option.

If you bought an options contract for one dollar with a strike price of ten dollars, you will be in profit if the stock reaches a price above 11 at the option’s expiration.

Situation 2: Break Even

If the stock price exactly matches the strike price plus the premium you paid for the option, you would break even.

Because eToro options will attempt to sell your options at 3:30 PM EST on their expiration date, if you held an option until then you would, in most cases, get back the premium you paid and this transaction would net you a whopping zero dollars and zero cents.

But, it wouldn’t cost you anything either.

Situation 3: Partial Loss

What if at the expiration date the price of the stock you bought was ten dollars and fifty cents? 

Well, to break even you needed the stock price to hit 11 dollars, because that’s the strike price of ten dollars plus the premium of one dollar, right?

In this case your option has some value – it’s still a contract that lets someone purchase 100 shares of a stock for ten dollars that, on the market, cost ten dollars and fifty cents.

Hence, if you held your option to its expiration date and you found a buyer, you would likely get back roughly half of that premium that you paid and you would be in partial loss.

Situation 4: Total Loss

Let’s say the stock price simply stays at ten dollars, or even worse goes down further. 

Either way, the right to buy 100 of a stock for ten dollars when it’s already trading at ten dollars is worthless – everyone can already do that.

Naturally, the right to buy it for ten dollars when it’s trading at nine dollars is similarly worthless, and that’s why in this situation you have a total loss.

We hope this simplified blueprint gives you a better idea of how options work.

Trading options isn’t right, for everyone but they do offer investors new and exciting ways to engage with the market.

Explore eToro options today.