Call Options: Second Lesson

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EDUCATION ONLY

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A call option is the right, but not the obligation, to buy a security (stock, ETF or currency) at a certain price (strike price) on or before a certain date (expiration). One option allows the buyer one hundred shares of the underlying security.

Let us examine the video on the perspective of the call buyer.

Jimmy bought one call option of Verizon stock trading at $60 per share. One option corresponds to 100 share of Verizon stock, and monthly options expire on the third Firday of each month. Jimmy pulls out an options chain, and elects one $.60 call option with $62.50 strike price, and April 17, 2020 expiration.

Case 1:

The Verizon stock moves to $61 a share on April 17, 2020. The option becomes worthless, and Jimmy loses $60 = 100 x $.60.

Case 2(a):

The Verizon stock moves to $65 a share on April 17, 2020 and Jimmy exercises the option. He profits $190 = 100 (65 – 62.50) – 60.

Case 2(b):

Jimmy sells the option instead of exercising it. He profits $190 = 100 x 2.5 – 60.

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