Buying an option example

An Example of How Options Work

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Key Takeaways Buying calls and then selling or exercising them for a profit can be an excellent way to increase your portfolio's performance. Investors often buy calls when they are bullish on a stock or other security because it affords them leverage. Call options help reduce the maximum loss an investment may incur, unlike stocks, where the entire value of the investment may be lost if the stock price drops to zero.

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Investors most often buy calls when they are bullish on a stock or other security because it offers leverage.

Consider the graphic illustration of the two different scenarios below.

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While both investments have unlimited upside potential in the month following their purchase, the potential loss scenarios are vastly different. Closing the Position Investors may close out their call positions by selling them back to the market or by having them exercised, in which case they must deliver cash to the counterparties who sold them.

The Bottom Line Trading calls can be an effective way of increasing exposure to stocks or other securities, without tying up a lot of funds.

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