How do Call Options Work?

When you purchase a CALL option, you have……

• The right (but not the obligation) to buy      

• A fixed number of shares at a set price (strike price)   

• On or before a fixed date (expiry date)

You would purchase call options when the market goes up, as they give you the right to buy shares.

The strike price is a fixed, pre determined price at which you can purchase the shares if you choose to exercise your right to buy.

As the buyer of an option, you can exercise your right at any time before the expiry date of that option.

Australian stock options expire on the last Thursday of every month. *This may vary over public holiday periods.

Each stock has set strike prices for trading. Depending on where the strike price is in relation to the current share price, influences the amount you pay, or the premium.

So how do you profit from call options?

The value of a call option increases as the share price rises. In the business of options trading, your objective is to onsell the call option before expiry for a profit. This is called short term trading and allows you to profit from a much smaller amount of money in a shorter period of time.

If you are still holding a call option on expiry day you may choose to exercise your right to buy those shares, however you would only do this if the current share price was above the option strike price. This would then allow you to sell those shares afterwards at a profit.

To your success

Jules Dawson