11 August 2015

Trading Stock Options: Call Buying Technique

​​​​​​Buying calls is popular with options investors, novices and experts alike. The technique involves buying calls on a stock or other equity whose market price you think will be higher than the strike price plus the premium by the expiration date.

​​​​​Alternatively, you buy a call whose premium you think will increase enough to outpace time decay. In either case, if your expectation is correct, you may be in a position to realise a positive return. If you’re wrong, you face the loss of your premium — generally much less than if you had purchased shares and they lost value.​​​​​

Investor Objectives

Call buying may be appropriate for meeting a number of different objectives. For example, if you’d like to establish a price at which you’ll buy shares at some point in the future, you may buy call options on the stock without having to commit the full investment capital now. Or, you might use a buy low/sell high strategy, buying a call that you expect to rise and hoping to sell it after it increases in value. In that case, it’s key to pick a call that will react as you expect, since not all calls move significantly even when the underlying stock rises. 

Some experienced investors may purchase calls in order to hedge against short sales of stock they’ve made. Investors who sell short hope to profit from a decrease in the stock’s price. If the shares increase in value instead, they can face heavy losses. Buying calls allows short sellers to protect themselves against the unexpected increase, and limit their potential risk.​​

Exercising your Calls

Most call contracts are sold before expiration, allowing their holders to realise a profit if there are gains in the premium. If you’ve purchased a call with the intent of owning the underlying instrument, however you can exercise your right at any time before expiration, subject to the exercise cut-off policies of your broker. However, if you don’t resell and don’t exercise before expiration, you’ll face the loss of all of the premium you paid. If your call is out-of-the-money at expiration, you most likely won’t exercise.

An Alternative to Margin​

For certain investors, buying calls is an attractive alternative to buying stock on m​argin. Calls offer the same leverage that you can get from buying on margin, but you take on less potential risk. If you buy stock on margin, you must maintain a certain reserve of cash in your margin account to cover the possible loss in value of those stocks. If the stock price does fall, you must add cash to meet the margin requirement, liquidate a portion of your position, or face having your broker liquidate your assets. If you purchase calls, you have the same benefit of low initial investment as the margin trader, but if the value of the stock drops, the main risk you face is loss of the premium, an amount that’s usually much smaller than the initial margin requirement.

Calling for Leverage

One major appeal of purchasing calls is the possibility of leveraging your investment, and realising a much higher percentage return than if you made the equivalent stock transaction.



Source: The Options Industry Council otherwise known as OIC

Trade Stock Options from £1.50 with Saxo Capital Markets

This offer only applies to clients using our new active trading price plans



Open a demo account in 3 easy steps

By clicking Continue, I agree to the Terms of Use and agree that Saxo Capital Markets UK Ltd or anyone in the Saxo Bank Group may contact me via phone or e-mail with information on products and services and to assist me in using any of the Saxo Bank Group offerings.Continue

The value of your investments can go down as well as up.
Losses can exceed deposits on margin products.
Please ensure you understand the risks.

Disclaimer: This material should be considered as a marketing communication under the Financial Conduct Authority's rules. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, nor is it subject to any prohibition on dealing ahead of the dissemination of investment research. Saxo Capital Markets UK Limited ("SCML") undertakes reasonable efforts to ensure that any information published in this communication is reliable. SCML makes no representation or warranty, or assumes no liability, for the accuracy or completeness of any information contained in in this communication.

SCML provides an execution only service and this communication does not take into account any particular recipient's investment objectives, special investment goals, financial situation, and special needs and demands and nothing herein is intended as a recommendation for any recipient to invest or divest in a particular manner and SCML assumes no liability for any recipient sustaining a loss from trading in accordance with a perceived recommendation.

Saxo Capital Markets UK Limited is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871

The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.