Call Option - Buying A Call

What is Call Option...

The buyer of a call option has the right to buy 100 shares of stock at the strike price and exercise the option before the contract expire.

The seller of a call option has the obligation to sell 100 shares of stock for purchase at the strike price.

Trade...

On 23 May 2012, Lowe's Companies, Inc.(NYSE:LOW) traded at $ 25.50, you expect the stock price will go up and buy a call option with strike price $23.00 which costs $3.00 per share. Paying $300 to own a call contract, you're " long one LOW June 23 Call".

What is your maximum LOSS...

Your maximum loss on this trade is $300.00.

Long Call

Stock price fluctuates and what will happen to your options...

In-the-money: If stock price goes up to $30.00, net profit of $4.00 [30-23-3=4]

Break-even: If stock price is $26.00, by exercising the option you gain $3.00,  break even after deduct the option premium paid. [26-23-3=0]

At-the-money &  Out-of-the-money : If stock price fall to $15.00, lower than strike price $23.00, you're not going to exercise the option. Your loss is $3 per share, the premium you paid.

Most options trader will sell the option instead of exercising it before expiry date. (Why Not Exercising the Option)