Call Options

Buying a call option is a direction play, if you purchase a call you want the market to go up. The money paid for the call option is called premium. The total risk for an option buyer is the amount of premium paid plus any trade fees and commissions.

Most option traders will use calls and puts to make simple directional trades in the market. Advanced traders will use an option to obtain the underlying issue, a stock, commodity or currency contract. You can exercise a call to obtain an underlying asset.

Familiar terms for call options

• Expiration: The expiration is the date when the option expires. If an option is out of the money at expiration then it is worthless. Most of the time expiration is stated in terms of month and year. A December 2004 Corn call, or a March 2005 Wheat call are two examples.
• Premium: The cost of the option expressed in points or dollar amount.
• Strike Price: This is the stated price at which a buyer of a call has the right to purchase a specific futures contract or at which the buyer of a put has the right to sell a specific futures contract.

Risk of Exercise
If a purchased call option is in the money (the market price is above the strike price) then your option can be automatically exercised by the exchange. At exercise the option holder will receive a long futures contract at the strike price of your option. A March 230 Corn call would exercise into a long March Corn future at 230 if the price of March Corn is above 230 on expiration day. One important note, when your option is exercised you will need to have sufficent funds in your account for the margin requirement.

Option Values Before Expiration
At expiration options are worth 100% of intrinsic value. Prior to expiration options can be worth more or less than their intrinsic value. Various market forces act on option prices prior to option expiration. Some of these forces are time before expiration, market volatility and interest rates. For example an important government report could cause a market to jump tremendously. Call option values for this market could jump considerably in response to the news announcement.

Calculating the breakeven for a call option at expiration
The breakeven of a call is the strike price plus premium paid in points minus any trade fees. A 230 Corn call bought for 5 points has a breakeven of 230 (strike price) + 5 (option premium) or 235 minus trade fees. Assuming it costs 1 point for trade fees, then your breakeven would be 236. At expiration the market must be higher than 236 to pay back the original cost of the option (5 points) plus transaction costs (1 point).