- What is a call option?
A call option is the right to buy at the strike price chosen. The price of an option is based on the intrinsic value (current price minus the strike price; never below 0) and the time value(time left to expiration).
Example of intrinsic value: Owning a $6.00 call and the futures price is at $6.25. Intrinsic value is $.25.
Example of time value: Owning a $6.00 call while the futures price is at $5.90. Intrinsic value is 0 as the Strike is above the futures price. Time Value is at $.10 to make it simple. (There are other factors in play such as volatility that is not explained here)
Why buy a call?
- Cover future needs of unpriced inputs for a buyer(i.e. cattle feeder).
- Re own bushels that have been sold and want to participate in a rally.
- Offset risk in a short future position.
- Adjusting other option positions.
Why sell a call?
- Collect premium.
- Offset risk in another strategy.
What are the risks of calls?
- Buying a call: losing investment premium paid for call
- Selling a call: unlimited risk technically
When to use calls?That is the question. Have a system to rely on to determine when to enter each strategy and how to adjust it as the market moves.