Did you know you can profit from the stock market without holding any stock in your portfolio? This is where the idea of trading options comes in. An option is a financial derivative, and it's essentially their right to buy or sell a certain thing on a certain day at a certain price. today. I'm going to talk about call options.

Now, you're probably wondering what is a call option. To put it simply, a call option is a type of financial contract. It gives the option holder the right but not the obligation to buy an underlying asset at a specific price within a specific time. A call option has three aspects to take into account when you look at them.

The first aspect is called the strike price. This means the specific price you can buy the underlying asset within the options expiration date. The second aspect is the expiration date. This is like a time limit within which the option can be claimed.

Finally, the third aspect is called the premium. This is the amount of money you'd have to pay to actually use the the option if you wanted to buy the underlying asset at the strike price and within its expiry date. If it sounds confusing, don't worry. I'll explain it further with an example.

Imagine an apartment is put on the market at a price of fifty thousand dollars. However, based on your own calculations, you believe the price of this apartment will increase over the next year. Instead of buying the apartment outright at fifty thousand dollars and waiting for the price to increase, you could purchase the right to buy the apartment at this price. Sometime within the next year, to purchase this right might cost one thousand dollars.

For example, in this call option setup, the fifty thousand dollars is the strike price. The one year time period is the expiration date. The one thousand dollars you pay for this right is the premium. So you're thinking, what are the benefits of trading call options or rather, why buy a call option instead of just buying the underlying asset? The primary reason investors buy options is to reduce their risk exposure.

Again, let's use the example of the apartment. Although you were convinced that the price of the apartment will shoot from fifty thousand dollars, there are still many risks you might have to deal with. For example, it could be destroyed in a natural disaster, a fire, or something else that might be affecting the overall housing market. A call option, however, could help hedge against these risks.

If you bought the apartment for the full market price of fifty thousand dollars, your maximum risk would also become fifty thousand dollars. As such, if things went wrong, it is entirely possible that you could lose the full fifty thousand dollars. However, if you decided to buy the call option described earlier for the premium of one thousand dollars, it would mean your maximum potential risk would be only one thousand dollars. You'd still get the same opportunity for profit potential as the person who bought the apartment.

At fifty thousand dollars, The only difference is that you would be less exposed than them. Let's dive deeper into how call options gain and lose value. The value of a call option will typically be determined by two aspects. The first aspect is the current price of the underlying asset in relation to the option strike price.

If the underlying asset price is higher than the strike price, the call option will be more valuable. The second aspect is how close the option is to its expiration date. If said option is close to its expiration date, it will become even more valuable. Let me use the apartment example again to explain this further.

Let's say, after 11 months, the price of the apartment was one hundred and fifty thousand dollars. One hundred thousand dollars more than the fifty thousand dollar strike price in the call option. Since the expiration period is one year, it means there would be only one month left until the call option expired. It's unlikely there would be any major changes in the price of the apartment during that time.

As a result, the lower strike price and imminent expiry would make this option significantly valuable as it's extremely likely to turn a profit when exercised. The reverse logic applies when trying to understand how a call option loses value. In essence, if the underlying asset price became lower than the strike price and was inching ever closer to expiry, the call option would become relatively worthless. After all, who'd want to buy an asset at a price higher than its market value? No one.

And by the way, if you're enjoying the video so far, don't forget to smash the Thumbs Up Button And Subscribe to the Channel. Moving on, let's talk about how call options are traded. Honestly speaking, a lot of call options are never exercised. Remember, although a call option gives you the right to buy an underlying asset at a specific strike price, you don't necessarily have to.

even if you stand a profit, The reason why options might not be exercised is actually simple. Usually, the profit that you could potentially make if you were to exercise your call option is often already baked into the premium value of the option itself. In other words, The Profit that you could make if you bought and sold the underlying asset would be the same if you decided to sell the call option for its premium instead. Interestingly, we can describe the value of a call option as either intrinsic or extrinsic.

Intrinsic value is realized when the underlying asset price goes above the strike price. So in the case of our apartment example, as long as the price of the property is above the strike price of fifty thousand dollars, it means that the call option has intrinsic value. Extrinsic value, on the other hand, is determined by the expiration date. In the case where a call option is far away from the expiration date, it means that there is still time for the price of the underlying asset to change.

This creates the potential for more gains, and so the extrinsic value of the call option would be much greater. But what are the risks associated with call options? Well, call options are very complex. Financial Derivatives The pricing of options contracts and how their value changes can be very complicated for the average person to work out. It is therefore essential to ensure you have extensively researched how to trade options before jumping in.

Additionally, call options are are time sensitive. It's no accident that they're designed to expire within a limited time window. The expiration feature of call options ultimately places a firm wall between yourself and long-term value development. They are for shorter term gains, and as with any shorter term investments, their risks are inherently higher.

So to recap first. I Discussed what call options are a way to gain the right to purchase an asset within a predefined time period called an expiry date for a set price called a strike price. The amount they can be purchased for is called the option premium. Then I showed you how call options can gain value if the underlying asset price goes above the strike price.

Even more so when near the expiration date. you also learn the reverse is true that options with strike prices above their asset prices become worthless, particularly when they're about to expire. It should be clear that you don't have to exercise your call option to profit from it either. They can typically be sold to realize the same profit return.

Finally, it's important to remember that options trading carries risk, so please do your own due diligence before you go. Don't forget to smash the Thumbs Up Button And subscribe to the channel I'll talk to you soon.