The Call Option

  1. 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?

  1. Cover future needs of unpriced inputs for a buyer(i.e. cattle feeder).
  2. Re own bushels that have been sold and want to participate in a rally.
  3. Offset risk in a short future position.
  4. Adjusting other option positions.

Why sell a call?

  1. Collect premium.
  2. Offset risk in another strategy.

What are the risks of calls?

  1. Buying a call: losing investment premium paid for call
  2. 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.

Sign up to try MarketChat for free.

Start your Free Trial