A call option is the right to buy the underlying future at a certain price.

Buy Call Options

When traders buy a futures contract, they profit when the market moves higher. The call option has a similar profit potential in the long future

When prices move upward, the call owner can potentially exercise the option at expiry to buy the future at the original strike price.

This is when the call will have the same profit potential as the underlying future.

However, when prices move down, you are not obligated to buy the future at the strike price, which is now higher than the futures price, because that would create an immediate loss.

Protection with a Cost(Premium)

With this downside protection, why would any trader buy a future, instead of a call option?

The potential to profit on a call option does not come without a cost.

The seller of the option will require compensation for the economic benefit given to the option owner.

This payment is similar to an insurance policy premium and is called the option premium. The buyer of a call option pays a premium to the seller of a call option.

As a result of the added cost of the premium, the profit potential for a call is less than the profit potential of a future by the amount of premium paid.

The price of the future must rise enough to cover the original premium for the trade to be profitable.

The breakeven point for a call is where the profit in the future that you can purchase at the strike price is equal to the premium paid for the call.

Sell Call Options

For every long call option buyer. There is a corresponding call option, the “seller”.

If you sell the call option, then you receive the premium in return for accepting the risk that you may need to deliver a futures contract at a price lower than the current market price for that future.

Call option sellers have unlimited risk if the future price continues to rise. Calls sellers will profit as long as the future price does not increase beyond the value of the premium received from the buyer.

The breakeven point is exactly the same for the call seller as it is for the call buyer.

To review call options are the right to buy the underlying futures contract, buyers of the call have protection against adverse price movements.

With this protection, they must pay a premium.

Sellers of call options collect premiums and accept the risk they may need to deliver a futures contract at the strike price.

There you have it!

For more information regarding available options, visit Coincall’s product pages.

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