Call options are financial contracts that give the buyer the right, but not the obligation, to purchase a specific stock at a predetermined price (known as the strike price) before a specified expiration date.
- Speculation:
Investors often buy call options when they believe that the price of the underlying stock will rise significantly. This allows them to leverage their investment, as they can control a larger number of shares for a relatively small upfront cost. If the stock price exceeds the strike price, the call option can be exercised for a profit.
- Income Generation:
Selling call options (also known as writing calls) can generate income through the premiums collected from buyers. This strategy is often used by investors who own the underlying stock and want to earn additional income while potentially selling their shares at a higher price.
- Tax Management:
Call options can also be used for tax management strategies. For instance, they can help investors defer capital gains taxes by allowing them to sell their stocks at a predetermined price in the future, rather than selling them outright.
- Hedging:
While less common, call options can be used as a hedging tool. For example, if an investor has a short position in a stock, buying call options can limit potential losses if the stock price rises unexpectedly
