Calls are special kind of leverage in Stock market


You can see how the calls provide a special kind of leverage to investors. They move in some relationship to the underlying stock; but each V$ of a movement in the stock is a mere percentage of what a V% movement in the related option may be in the stock market.

Calls are special kind of leverage in stock market or share market


You can see how the calls provide a special kind of leverage to investors. They move in some relationship to the underlying stock; but each V$ of a movement in the stock is a mere percentage of what a V% movement in the related option may be.

You can also see how important the underlying stock is. Gains in the calls are highly dependent upon the movement of the underlying stock. Thus, when you are buying calls, you must not only pick the right stock, you must pick the call with the best potential; that is, the call with the right money position, striking price, and expiration date to offer you a worthwhile return.

Calls are fun. There are so many to pick from and so many ways to play them in combination. And you are not limited to buying one call on any given stock. You could choose to speculate in every call available.

Calls are not only fun, but can result in incredible rates of return. There is, of course, one big caveat: Not too many investors are able to make money on calls. Excellent timing, as well as selection, is necessary to stay in the black, to make the good money. It can be done, but do not for one moment believe that it is easy.

If the market price of the stock never passed the striking price by expiration date, all of the out-of-the-monies and at-the-monies would have expired worthless. If the stock depreciated in value, even the in-the-monies could have expired worthless.

Calls are a gamble, but a low-priced and sometimes worthwhile gamble


Option Price Movement


There are a number of factors which influence the price of an option, so thinking of premiums simply in terms of intrinsic and time values does not put the market in proper perspective. These factors are:

a. Price movement in the underlying stock
b. Volatility of the underlying stock
c. Time remaining until expiration
d. Striking price
e. Dividends
f. Interest rates

The price movement in the underlying stock naturally affects the premiums for the related options. This relationship has already been discussed. But it is important to realize that very often a stock can move up in price but the options do not respond. A lot depends upon how far out of the money an option happens to be and how close the expiration date may be. You will find examples in coming sections on buying puts and writing calls that show the price movement of options over a given period. In some cases you will see fractional or full-point changes, at other times you will see none—depending on the striking price and the expiration date for the option. These examples will reinforce in your mind the fact that options will move very differently depending upon their intrinsic and time values. Hidden influences on time value include such things as interest rates, volatility of the underlying stock, and dividend periods.


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