by Das Brain
What are call option contracts?
This is going to be a more general description of what call contracts are. First of all, let’s talk about what is common amongst all option contracts whether they are calls or puts. All option contracts you purchase have a strike price and expiration date.
What is the strike price?
Basically, the strike price is where you think or bet that the stock price of the underlying equity will go to by the expiration date.
What is the expiration date?
This is when the option contract expires, and becomes worthless, and cease to exist.
Here is an example with a call contract. Let’s say I purchase a option contract for YAHOO. The current price of the actual YAHOO stock is at $28.35, the symbol for the stock is YHOO. The option contract is as follows: YHOO Jan 2008 30.00 call
The symbol for that option contract is: WYHAE.X.
So the above means is that I bought an CALL option contract for Yahoo stock with a strike price of $30 expiring in January 2008. A call contract is a contract where you are hedging that the stock price of the underlying stock will be the same or going higher. This means that I am betting that Yahoo stock will be at $30 by January 2008.
The cost (premium) of 1 contract was $3.57, but one thing you have to remember is that 1 option contract gives you the right to buy 100 shares of the actual or underlying YAHOO stock, so the actual cost of the contract needs to be multiplied by 100, so you pay your brokers $357 + commissions for that 1 YAHOO contract.
75% off Option Trading E-books at ReadLearnTrade.comÂ
If the YAHOO stock does go higher then the premium on the contract also goes up. There is a direct relationship. So let’s say in June 2007 YAHOO stock hits $31, and your Yahoo contract goes from $3.57 to $4.85, and you decided to sell the contract at $4.85.
Let’s examine the opening and closing transactions, with a $10 commission.
Bought 1 YHOO Jan 2008 30.0000 call @ $3.57 X 100 = $357
Sell 1 YHOO Jan 2008 30.0000 call @ $4.85 X 100 = $485
Subtract $10 commission to buy, and $10 commission to sell, which equals $20
So Profit is $485 – $357 = $128 -$20 = $108
Now if I had bought two call contracts instead of one then my profit would have been much higher. As an exercise you can do the math for 2 contracts bought and 2 contracts sold.
Bookmark at:
StumbleUpon | Digg | Del.icio.us | Dzone | Newsvine | Spurl | Simpy | Furl | Reddit | Yahoo! MyWeb
