Buying a CALL OPTION
To buy a CALL option means that as a buyer, you are buying the right but not the obligation to buy a particular stock at a particular price on or before a particular date know as the contract expiry date. The price of a call option will rise in price as the stock increases.
Selling a CALL OPTION
To sell a call option means that as a seller you would be receiving premium in return for selling a promise that you will deliver a particular amount of a particular stock at a particular price to the market should the contract be exercised within the contract period. Should you be exercised you are obligated to deliver the stock as per the contract. If you don’t already own the stock then you have to buy the stock at market value and sell it back at the agreed price.
Selling options is usually transacted to take advantage of the premium in the hope the stock will close at a particular level meaning you would keep the premium as opposed to being exercised and having to provide the stock.
If you own the underlying stock then this is called writing a ‘covered call’. If you don’t own the underplaying stock you are defined as trading a ‘naked call’
Weather you exercise your rights or are obligated to provide stock to the market; this is all dependant on what the stock price is at the time of purchase and what the stock price is at the time of selling.
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