Call options: What are they and how they obligate you

Date Wednesday, January 28th, 2009

Many people struggles with the ideas of buying and selling options, although it is not a really difficult subjects to understand, it does requires more efforts to understand the subject thoroughly. It is therefore my objective that you can understand this wonderful financial instruments well and use it to your benefits.

The basic of trading in options, you must understand that when you buy an option, you have the rights to something from someone but when you sell an options you now no longer have the rights but now you are under obligation to deliver something to someone.

Not many people understand options because they never realized that it actually existed for thousand of years ago. If you look at it then you realized that the concepts of option has been living around us for many many years and yet we do not realize it.

For example: When you wanted to buy a house, you give the seller a small sum of money as a booking fee that you wanted the house and that the seller has agreed to sell it to you. You are actually buying the options to buy the house at the price agreed. What happened when the following weeks the house price increases many fold due to the announcement from the government, would the seller be able to cancel the transaction. No he cannot because you now have the right to buy the house from the seller and the seller has the obligation to deliver the house to you upon you meeting the condition of the agreement.

But now what happened when the price of the house goes down by more than 50%. Can the seller force you to still buy the house at the price you agreed based on the agreement. No he definitely cannot. If you decided not to continue with the purchase of the house, then the seller got to keep your booking fee and the booking fee is gone. This is exactly how it works with options

Another example is when you buy a tv from your local store, you pay a deposit and you buy that tv, and if you suddenly decided to cancel the purchase on the next day, you would have lost the deposit, but that electronic store cannot force you to still buy the tv. but on another side, if you have paid the deposit, the store cannot sell the tv to other people.
This is another form of options at work.

Now if you have already understand how options works, than we can discuss further the type of options available for you, we will cover Call options in this section.

Call means you call someone to deliver something to you and when you buy something means you want what you bought to appreciate in value.

So a call options means that you have the right to buy the underlying stocks at the price stated in your call options or what we know as strike price. You buy call options because you expect the stock to goes up even further.

by Leo Enoch

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