What is a Call Option? - Stock Options for Beginners
What is a Call Option?
A call option pays out when the stock price exceeds the strike price on Maturity Date.
• Payout: The option pays the difference between the stock price and the strike price, minus the premium paid.
Example:
• Strike Price = $100
• Stock Price at Expiration = $128
• Payout = $128 - $100 - Premium Paid
• Payout when stock price is higher than strike price:
If the stock price is below the strike price, the call option expires worthless.
• The premium (the cost of the option when you buy it) is the maximum loss.
• Implied volatility (explained in the Option Q&A in the App - video to come) is crucial in options pricing. Higher volatility increases premiums, making options more expensive.
• Volatility vs. Stock Movement:
If the stock price goes up but volatility drops, the value of a call option might decrease.
This is because lower volatility limits the potential for larger price moves, reducing the upside.
• Tip: Sometimes it’s better to wait a few hours after market open when volatility is lower, as this can lead to cheaper premiums and more potential upside for calls.
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