Buying Calls

Example

ZYX is trading at $44.25, so 100 shares of stock would cost a total of $4,425. However, an investor could instead purchase one six-month ZYX 45 call, which represents the right to purchase 100 underlying ZYX shares at $45 per share, for a quoted price of $3.25. The total cost for the call would be: $3.25 x 100 contract multiplier = $325, a fraction of the total stock purchase price. Instead of committing $4,425 on the purchase of 100 ZYX shares, spending only $325 for the purchase of one call would leave a balance of $4,100 that could then be invested in short-term, interest-bearing instruments. By purchasing the call the investor is saying that by expiration he anticipates ZYX to have risen above the break-even point: $45 strike price (at which price ZYX can be purchased no matter how high it has risen) + $3.25 (the option premium paid), or a ZYX share price of $48.25. The investor's profit potential is unlimited as ZYX stock price continues to rise above $48.25. The risk for the call purchase is limited entirely to the total premium paid for the contract, or $325, no matter how low ZYX stock price declines. Before expiration, if the call purchase becomes profitable the investor is free to sell the option in the marketplace to realize this gain. On the other hand, if the investor's bullish outlook proves incorrect and ZYX declines in price, the call might be sold to realize a loss less than the maximum.

Buying Calls

Who Should Consider Buying Equity Calls?
An investor who is very bullish on a particular stock and wants to profit from a rise in its price.
An investor who would like to take advantage of the leverage that options can provide, and with a limited dollar risk.
An investor who anticipates a rise in value of a particular stock but does not want to commit all of the capital needed to purchase shares.

Buying an equity call is one of the simplest and most popular strategies used by option investors. It allows an investor the opportunity to profit from an upward move in the price of the underlying stock, while having less capital at risk than with the outright purchase of an equivalent number of underlying shares, usually 100 shares per call contract.
Definition
Buying an equity call gives the owner the right, but not the obligation, to buy 100 shares of underlying stock at a specified price (the strike price) at any time before a specific time (the expiration date). This is a bullish strategy because the value of the call tends to increase as the price of the underlying stock rises, and this gain will increasingly reflect a rise in the value of the underlying stock when the market price moves above the option's strike price.The profit potential for the long call is unlimited as the underlying stock continues to rise. The financial risk is limited to the total premium paid for the option, no matter how low the underlying stock declines in price. The break-even point is an underlying stock price equal to the call's strike price plus the premium paid for the contract. As with any long option, an increase in volatility has a positive financial effect on the long call strategy while decreasing volatility has a negative effect. Time decay has a negative effect.

Call Options and Put Options

Some people remain puzzled by options. The truth is that most people have been using options for some time, because option-ality is built into everything from mortgages to auto insurance. In the listed options world, however, their existence is much more clear.
To begin, there are only two kinds of options:

Call Options and Put Options.

A Call Option is an option to buy a stock at a specific price on or before a certain date. In this way, Call options are like security deposits.
If, for example, you wanted to rent a certain property, and left a security deposit for it, the money would be used to insure that you could, in fact, rent that property at the price agreed upon when you returned.
If you never returned, you would give up your security deposit, but you would have no other liability. Call options usually increase in value as the value of the underlying instrument increases
When you buy a Call option, the price you pay for it, called the option premium, secures your right to buy that certain stock at a specified price, called the strike price.
If you decide not to use the option to buy the stock, and you are not obligated to, your only cost is the option premium.
Put Options are options to sell a stock at a specific price on or before a certain date. In this way, Put options are like insurance policies
If you buy a new car, and then buy auto insurance on the car, you pay a premium and are, hence, protected if the asset is damaged in an accident. If this happens, you can use your policy to regain the insured value of the car. In this way, the put option gains in value as the value of the underlying instrument decreases.
If all goes well and the insurance is not needed, the insurance company keeps your premium in return for taking on the risk.
With a Put Option, you can "insure" a stock by fixing a selling price.
If something happens which causes the stock price to fall, and thus, "damages" your asset, you can exercise your option and sell it at its "insured" price level.
If the price of your stock goes up, and there is no "damage," then you do not need to use the insurance, and, once again, your only cost is the premium.
This is the primary function of listed options, to allow investors ways to manage risk.