Call option is a kind of financial contract, which gives the option buyer the right to subscribe for stocks, bonds, commodities and other assets or financial instruments at a fixed price within a specified time, but does not require the option buyer to have the obligation to purchase. Stocks, bonds and commodities are basic assets. When the underlying assets appreciate, the option buyer will make a profit.

The opposite of a call option is a put option. Put option gives the holder the right to sell the underlying assets at a certain price before the deadline.

main points

Call option gives the holder the right to subscribe for a certain number of underlying assets at a fixed price within a specified time, rather than stipulating the subscription obligation for the holder. The fixed price is also called the exercise price, and the prescribed subscription time is before the deadline or expiration date. You have to pay a fee to buy a call option, which means you have to pay an option premium.

If you buy a call option, you will lose the most money you paid for it. Investors can buy call options to realize opportunistic profits, or sell call options to earn premium income. You can buy all kinds of call options to implement the spread or portfolio strategy.

Introduction and application of call option

Concept introduction

Buying call option is one of the basic option strategies and the mainstay of many strategies.

It means that investors choose a certain exercise price and pay the corresponding premium, so as to obtain the right to buy the corresponding target of call option from the seller at the exercise price (some commodity options and equity options are delivered in cash).

Profit and loss diagram

The profit and loss chart of the call option has well reflected the structure of the call option, -C represents the premium paid by the buyer, and K represents the exercise price of the call option (that is, the target can be bought at this price in the future).

In addition, we drew two curves (red and black), in which the red line represents the profit and loss curve of the exercise, and E is the break-even point. As long as the target price ≥ exercise price+paid royalties+other expenses at maturity, it is beneficial for the holder to exercise.

The black line represents the liquidation curve, and the difference between the black curve and the red curve mainly lies in the time value and volatility. It can be seen that the biggest loss of a call option is the premium paid, and the biggest gain in theory is infinity.

Benefits of buying call options

Have the right but no obligation

To buy a call option, you can get the right to buy the underlying asset at a fixed price (or give it up) only by paying the corresponding royalty, without other obligations; So the loss is locked, that is, your commission, and the income depends on the increase of the target price, which is theoretically infinite.

Lever amplification

Buying call options is different from buying futures. First, there is no need to pay a deposit. Second, you only need to pay a premium (the number of lots is lower than the futures price), which increases the leverage and retains the opportunity to gain income.

Application conditions

Buy when the target price is expected to rise sharply.

Only when the price of the option target rises greatly can the implied volatility increase, and its income can cover the premium paid for the call option and the loss of time value decline.

Buy when implied volatility is low

Unless the underlying price keeps rising sharply, it is not recommended to buy call options when the underlying price is high, because once the underlying price cannot keep rising sharply, the decline of implied volatility and time value will lead to a sharp drop in your call option price, resulting in losses.

Specific application

# Select the month to purchase the call option contract

We already know the purpose of buying call options and the judgment of the increase, so we also need to know whether the increase of the underlying price is in the near future or in the medium and long term, which determines the contract you choose.

If it will rise in the near future, you need to choose a recent option contract; If the price of medium and long-term target will rise, then you should choose medium and long-term option contract instead of short-term option contract, otherwise the decline of time value and hidden fluctuation will be your enemy.

# Choice of exercise price

The choice of exercise price mainly depends on your control of the target increase.

If you think that the underlying price has increased greatly, you can choose a relatively imaginary call option. Although the Delta of the call option with relatively imaginary value is small, if the increase can gradually approach or exceed the exercise price of the call option with imaginary value, then Gamma will gradually enlarge and accelerate the increase of the call option with imaginary value. Please refer to the latest stock market on July 6, 2020, as shown in Figure 4 below.

On the contrary, if the increase of the option target is limited, then you should buy a call option that is biased towards the real value, or even give up buying a call option (this needs to be analyzed in combination with other factors).

# Timing of buying call options

The timing of buying call options is flexible and changeable, and the specific problems are analyzed in detail.

Combining the above points, choosing a better time to buy call options will create unexpected benefits. If you don't clearly understand the above application conditions and grasp the timing of buying call options, then buying call options will become worthless.

At the same time, the time value of call options with short maturity will decrease rapidly.

danger

Decline in implied volatility

Buying a call option is actually afraid of the decline of volatility and implied volatility, which also means that the underlying price has not continued to rise sharply, which is why it is recommended to buy a call option with low implied volatility, because the space for the decline of implied volatility is relatively limited;

At the same time, it is not recommended to buy call options with high implied volatility. Once the price can't keep rising significantly, the implied volatility of call options will drop significantly, and the option price will also drop significantly.

The decline of time value

The decline of time value is also the risk point of buying call options. As the due date approaches, the time value will decrease more and more, and it will further accelerate to zero in the last week. So be careful to buy more call options that expire in the last week (unless you think the price will rise sharply and participate in doomsday options).

for instance

Chart 2 below shows the year 2020. The left picture shows the trend chart of Shanghai and Shenzhen 300, and the right picture shows the price trend of call option with exercise price of 4650.

When it rose sharply on July 6, you thought that the underlying price would rise again, so you chased it up, bought the Shanghai and Shenzhen 300 call option with a strike price of 4650 and paid a premium of about 150;

As you expected, the price of the target (4744) was higher than that of July 6 (4670) until July 15, but the price of the corresponding IO2007-C-4650 has dropped to 108, which means you lost 42% in one hand.

The base price is still rising, but buying call options is a loss. What is the reason?

This reason is the influence of the above two risk points:

The first is the decline of implied volatility. The above picture shows the trend of implied volatility of IO2007-C-4650. It can be seen that the decline is obvious, and the corresponding call option price will also decline.

The second is the decline of time value. The maturity date of the CSI 300 stock index options is the third Friday of the delivery month, that is, it expires on July 17. Near the last trading day, the time value also fell sharply, so its price also fell sharply and became worthless.