2.2 Call Options Basics

You might have heard a common terminology thrown around in investing: "long" and "short".

To put it simply, going "long" or "short" is just financial jargon for saying " I'm buying" or "I'm selling". In this article, we'll talk about two very basic ways to implement options in investing: long and short options.

A long call is when an investor purchases a call option with the hope that the price of the underlying asset will rise above the strike price.

If the price of the underlying asset increases above the strike price, the holder can exercise or potentially sell back the option to make a profit. If the price of the underlying asset does not increase above the strike price, the holder can let the option expire and only lose the cost of the premium.

Let's look at an example of a long call in practice:

John believes that the price of ETH, which is currently trading at $3,000, will increase in the near future.

Instead of buying ETH outright, John decides to purchase a call option on ETH, with a strike price of $3,200, expiring in three months. John pays a premium of $150 for the option. Three months later, the price of ETH has indeed increased, and its now trading at $3,500. Since John holds a call option with a strike price of $3,200, he can exercise the option and buy ETH at the lower price, and then sell it immediately at the higher market price, making a profit.

In this example, John successfully profited from a long call position.

Selling a call option is known as taking a short call position.

This position is taken by an investor who believes that the price of the underlying asset will remain the same or decrease. By selling a call option, the investor collects the premium and hopes that the option will expire out of the money, allowing them to keep the premium collected.

However, if the price of the underlying asset increases above the strike price, the investor may be obligated to sell the asset at the lower strike price, resulting in a loss. Therefore, short call positions are considered risky, and it's important to have a solid understanding of the market and underlying asset when using them.

Let's look at an example of a short call in practice:

Alice owns 1 ETH, which is currently trading at $3,000, and she doesn't expect the price to increase significantly in the near future.

Alice decides to sell a call option on her ETH with a strike price of $3,700, expiring in one month. Alice collects a premium of $100 for the option.

One month later, the price of ETH remains below the strike price of the option, and the option expires worthless. Alice keeps the premium of $100 as profit.

In conclusion, call options give the holder the right (but not the obligation) to buy an underlying asset at a specific strike price at a pre-determined expiration date.

Long call positions are used to speculate on the future price movements of an underlying asset, while short call positions can be used to generate income and profit from assets already held by an investor.

Call options can also be used for hedging and implementing complex strategies. However, it's important to remember that like other financial instruments, call options are complex and involve significant risks, so it's crucial to fully understand their properties before using them as part of an investment strategy.