Fundamentals
Generate Income,Trade Options Like a Pro
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Option Strategy - Call Option
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Trading call option contracts involves three participants. One is the clearinghouse (the institution that enables you to offset transactions with one another in order to limit payment settlements to net balances). The other two are the contracts seller (writer) and the buyer. A buyer of a call option contract has the right but not the obligation to buy the underlying security at the strike price, no matter what the underlying securities price on the market. The call option contracts seller (writer) has the obligation to sell the underlying security to the call option contract buyer. The seller has to have enough capital to back the obligation of a contract. The role of the clearinghouse is to check if initiation of the trade is possible, and maintain (mark-to-market; an act of assigning a value to a based on the current market price) the position on daily and intraday basis. From inception to expiration, the clearinghouse acts upon the options buyer request to exercise the contract (if it is an American style). A transaction leads to a one open position in the market. |
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The gray line shows the actual P&L at the position inception time (or buying an existing call option contract on the exchange). No other variable having changed except the underling security price, P&L = zero at the price of $50.00, P&L = $0.95 at the price of $51.50 and P&L = -$1.42 at the price of $47.00. Notice that the P&L is not linear to the underlying securities values. The black line shows the P&L at the expiration, if the underlying security price stays $50.00, the option buyer loses the premium paid ($2.66). |
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