Call option trading is only one side of the option trading coin and therefore only completes half the picture when it comes to the possibilities with options. Nevertheless, even on its own, call option trading can be a powerful ally.
The beauty of options trading is that you can take advantage of the market whichever direction the price action goes - up or down. For net debit positions, you normally use call options if you believe the price will rise, or in some cases, remain stable ... and put options if you believe the price will fall. For credit positions such as credit spreads, you do the opposite. So while our focus is on call options here, it's important to understand that it's only half the option trading story.
So What Is It With Call Options?
Call options allow the holder of the contract to buy an agreed number of an underlying financial instrument such as company stocks, for an agreed price, any time up until an agreed expiry date. At face value, it's as simple as that. But underneath this simple concept is a whole world of mathematical formulae. Fortunately for us, computer programs do all that for us these days and we just see the numbers. As your understanding of options grows, it's worth understanding what those numbers mean and how you can best utilise them to your advantage.
But coming back to the simple concept. If an option contract gives you the right (but not the obligation) to purchase stock at an agreed price, then that contract will increase in value as the underlying stock price increases. For example, if you have the right to buy shares at $25 when the price is $30 then you have $5 worth of intrinsic value in the contract. Should the price continue rising to $35, the fact that you can purchase the stock at $25 and immediately sell back to the market for the current trading price of $35, means that your option contract now has at least $10 of intrinsic value.