Call options are contracts that give the holder the right, but not the obligation, to purchase an underlying financial product at a specified price within a specified time. Put options are contracts that give the holder the right, but not the obligation, to sell an underlying financial product at a specified price within a specified time.
There can be many reasons for buying calls or put options depending on what you want to achieve. This guide will help you understand the call and put options better. It outlines the advantages and disadvantages of both and how they work in Hong Kong markets. The second section describes what you should consider before buying an option.
An issuer may choose to make an offer by calling for tenders for its debt securities. When the issuer calls debt securities, it offers all debt security holders the opportunity to tender them back at a specified price. Early redemption may be done if there is an agreement between the issuer and investor or by giving investors 30 days notice via a public announcement.
If you are thinking about buying call or put options, this article will help you understand what they are better, why you should consider both types of options for your portfolio, as well as what you need to do before making a purchase.
Advantages and disadvantages of call options
Advantages
Limited risk: The maximum loss for a short position is limited to what you paid for it, plus commissions and fees
It allows investors with no stock-picking skills to participate in a market that would otherwise be beyond their abilities.
Allows an investor to benefit from both rising and falling stock prices instead of just riding the wave with long positions.
It can provide diversification benefits by removing substantial amounts of risk from your portfolio by hedging against adverse movements in the underlying stocks.
Disadvantages
Costs involved in premiums and commissions. It can be expensive to buy call options as premiums refer to the payment given by the buyer to the seller for acquiring the option. Exiting prematurely also involves buying back the call options at a high price, which can cost money.
Opportunity costs: Speculators need to consider that their capital is tied up in the call options they bought, preventing them from taking on other opportunities with potentially more significant returns when trading stocks.
Income tax implications: Taxes are due only when you make a profit from your investment. You cannot use losses on investments to offset gains made from other investments, so the timing of trades becomes crucial when taking up new positions.
The trouble is that this information applies only to those who know nothing about volatility and time decay. If you do know a bit of these terms, then all you need to know is that a strategy based on viewing your broker’s statements is bound to lose you money in the long run.
Your broker charges you fees for buying call options, but he would also offer you free advice. Brokers routinely show investors how much they have made them on option deals. The trouble is that this information is valid only to those who know nothing about volatility and time decay. If you do know a bit of these terms, then all you need to know is that a strategy based on viewing your broker’s statements is bound to lose you money in the long run.
Start by taking a step back and looking at the bigger picture. Then you need to understand the mechanics of option pricing before putting any money on your hunch.
You can make yourself better informed about call options by linking into Saxo. An essential consideration for buying put or call options is their expiration date.
Options expire after a certain period. The first thing that comes to mind is, “Why would someone sell an option that expires in three months if the stock price could jump up next week?” The truth is you can still make money off selling options with long expiration dates.
