A call option is a right to buy at a predetermined price. One who sells it right so to someone else this right and takes itself a duty to sell itself. Investors can through call options to increase their risks or decrease properly.
Mr. A buys one call option Shell shares with an exercise price of 25 euros. This means that A at the end of the term of the option may purchase 100 shares at a price of 25 euros each. The option premium is 2 euros.
How much profit or loss makes Mr. A?
There are two possibilities
1. Shell shares listed on the closing date under 25 euros. Mr. A shell can buy shares for 25 euros but will not do this because he can buy the stock at a lower price. His option is worthless and he loses his option premium of 200 euros.
2. It goes well with the Shell share and the price has risen on the maturity date to 30 euros. Mr. A therefore decided to exercise its option to buy 100 shares and Shell for 2500 euros. The market value is currently 3000 euros. Mr. A has paid 200 Euros for his option for 2500 euro now buys Shell shares. Its total cost is now so 2700 euros. For this, he has 100 Shell shares gained possession leaving his profit is no less than 300 euros.
Rising share price Shell, however, to 30 euros as in the previous example, will Mr. 100 B shares must deliver at a price of 25 euros each. He also received the option premium of 2 euros per share, giving him a total of 27 euros per share received. He will, however, this should deliver 100 shares worth 30 euros each making his loss comes at 300 euros.
An option to sell shares it does not own can be very dangerous. There is no limit to the maximum loss. Was the price for instance increased the proportion Shell for 45 euros, had Mr. B still have to deliver at a price of 25 euros per share. He will receive 2500 euros for the shares plus an option premium of 200 euros, but should provide for Euro 4500 shares. This results in a loss of 1,800 euros.
Investment; What is a Call Option?