When to Buy Call Options?

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A majority of the stock market chunk seems to be interested in a complex trading avenue known to be option trading– preferably in call options. But do they know when to buy call options, or they just trade without any strategy?  

Well, the answer can be simplified through a few ways, but prior to that, an investor must have information regarding options and call options. 

If you are into investment and trading, then you must have an idea about the segments in the investment world such as equity, currency, commodity, derivatives, mutual funds, etc.

And from the derivatives come futures and options. Both of them are a kind of a non-physical contract signed between two parties (buyers and sellers); however, they differ from each other in many ways.

Options Trading involves an agreement or contract between two parties- buyer and seller that gives a right to the option holder to sell or buy the underlying asset, commodity, or security within the validity of the contract and at a fixed price. 

This fixed price is technically known to be Strike Price

They are known to be derivatives as they derive their value from an underlying asset.

Options can be really powerful as they tend to enhance the portfolio of an investor and bring shows of diversification. They can be helpful in risk-management, protection against losses, balancing trading, and even through leverage.

So, it’s definitely a bag full of a wide range of diversification products.

Now comes the concept of Call options. Many of you might be thinking about what it is and how it is related to options? And we believe a few of you must have information about the call option.

Well, if not, then let’s have an understanding of call options, shall we?

Call options are exercised by the buyer who bets or favors the bullish condition but to prevent himself from any kind of losses, and he enters into the call option contract that can help him earn profit even when the price of the stock goes against him. 

However, this needs to be done within the validity of the contract and at the fixed strike price. 

Now, a question arises- how and when to buy call options? Quite surprisingly, the answer to the same lies in the underneath section.

What to Look When Buying a Call Option?

In this section, we will discuss the parameters one should look at when he or she buy call options. Although option trading risks are innumerable, however, with proven strategies one can earn huge returns.

Now, let’s see what’s the right time to decide when to buy a call option!

Before planning to buy a call option you must have a clear picture of your objection and then search for the best option that you can buy as per your needs. While buying options, you must also consider a few things which are as below:

Things to consider while buying a call option

  • Your time duration to be in the trade
  • The money you can spend on buying a call option
  • The movement you expect from the market along with its length  

Let’s give each of the above a quick overview! 

  • Your time duration to be in the trade:

This factor will help you in determining the time you require for a call option. In case, you analyze that an underlying asset will swiftly rise higher within three weeks, then you will be required to buy the same with at least three weeks remaining on it.

Without a doubt, strategically you will not purchase an option with eight to ten months remaining if your plan on being trade is just a week or two because if you do so, you will lose leverage and will bear a higher cost of the call option.

  • The money you can spend on buying a call option

Money is a big constrain while buying call options as your budget and risk tolerance totally depends on it. In the investment sector, a few options contracts will be highly expensive yet offering an attractive return.

While others will not be worth the buy. 

So, you must know what’s the maximum amount you are ready to spend while buying a call option along with keeping in mind its potential risk and returns.

  • The movement you expect from the market along with its length

Finally, the length of a stock movement you expect a market can show must be taken into consideration. Quite an aggressive strategy in the stock market will be to purchase several option contracts of out-of-the-money (OTM) options. 

Also Read: What happens when the option expires out of the money?

For sure, your potential returns will increase with such a strategy or technique if the market makes a large move higher. 

However, on the off chance if a market doesn’t show any move there are certain chances that you will lose option premium.

Now, let’s see some of the trading conditions when to buy call options-

In the trading event, when a security’s or asset’s cost rises before the expiry date of the contract, purchasing a call option may return a benefit to an investor. 

However, on the outside chance that there is without a doubt an increase in the total value of a security, it ought to be purchased at the strike cost and must be quickly sold off at a higher market cost.

Holder of call options can also wait for a chance to avail an additional value rise. 

Option holders must also make sure that such an option isn’t exercised if the cost of an underlying security or asset falls to rise above the striking cost.

In such a circumstance, the investor will just suffer a loss in the premium amount. This methodology remains constant regardless of whether the cost of security or asset falls to zero. 

While exercising a call option, return or intrinsic value-generating to an investor is the leftover of security continues after deducting the striking value, call option premium, and any other related transactional charges. 

Purchasing a call option can be more profitable than buying an asset or security because the latter gives more leverage to the holder. But before investing funds, it is good to learn how to calculate profit on call option?

In case the value of the underlying asset rises, the holder stands to make generous additions instead of just selling the security. 

Even if the overall cost of an asset drops swiftly, the investor will just lose a fixed sum. It would limit any further misfortune that a financial investor may have in some way or another cause. 

It prompts better yield in any event, for a lower investment. The financial investor may likewise sell-off options with a rise in the asset’s price. It empowers the investor to make a benefit without paying for securities.

Closing Thoughts

Usually, financial investors keen to invest or opt for call options have a question- when to buy call options. And today, through this article, we tend to answer the same in a simple and straightforward way. 

There will be certain times in the trading when you will know that it is the right time to buy call options. All you require is to be familiar with those times.

The most profitable time to yield benefits by buying call options is when an asset value increases before its exercise date.

However, if there is a short increase in the stock price, it must be purchased at the strike price and then immediately sold off at a higher value. Undoubtedly, it’s the best way to earn profits from call options.

And what else is required? Patience…

Yes! With a little more wait you can search and find stocks at a higher price rise. So if you strategically understand when to buy call options you can explore huge advantages related to it such as cost-efficiency, risk diversification, greater returns, and a lot more!

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