A call option is an independently agreed-upon contract between a buyer and a seller. Using a call option, a buyer has the right to buy a specific product, but the person is not obligated or forced to do so. Call options are decided at a pre-determined price for a certain period.
These options are usually made for a particular stock, bond, or any commodity in the stock market. These items are called underlying assets. A call buyer’s profit is directly proportional to the price of these underlying assets. Call options can be used in a wide variety of strategies, from conservative to high risk.
Various factors and parameters affect call option prices in the stock market. A call option calculator is a tool that computes and analyzes these factors that affect the value of call options. Read on to know more.
- Price/Value of the Underlying Assets
Call option prices are highly unpredictable and unreliable. The price or value of an underlying asset, for which a call option is determined, places a vital role in generating profit.
A buyer can make money if the value of the asset increases during the specified period. The higher the value of the assets, the higher the price of the call option. If the asset price/value decreases, the call option price also decreases. The buyer has to bite the dust.
- Value of Strike Price
In stock market trading, a strike price is a value at which a trader buys or sells a stock when he calls for the call option pricing. The value of your call option goes up when the strike price goes down.
The reason is, the asset value also goes above the strike value. Call options can help us gain more money only if the stock price goes above the strike price.
- The Expiration Date of Call Option
The expiration date of a call option majorly affects its value. The more time you have left for the contract to expire, it is worthwhile. You have enough time to await your chance to make a profit in the stock market.
A long-lasting period increases the chance of stock market price to match the strike market price of your call option or go higher. If your contract expires before the stock market works in your favor, it becomes insignificant.
- Volatility of Stock Price
The volatility of the stock price is the probability of a fluctuation of an underlying asset price. It is always better to have a highly volatile stock price.
Uncertainty in stock price increases the possibility of hitting your strike price. Once the stock price goes above the strike price, you can generate high revenue.
- Interest Rates
When interest rates become higher, there will be a significant cut-down on spending. Businesses will have lesser earnings. It will eventually make the stock prices drop drastically.
The value of call options is directly proportional to the interest rates on stocks. When interest rates rise, the value of call options also rises.
A call option calculator can help to calculate the volatility of stock prices. Volatility can be predicted based on historical (past fluctuations) data or implied (future predictions) data.
Considering the factors and parameters mentioned above, a calculator provides the approximate value of stocks and the trading prices of the previous few days. It provides an easier way to determine the returns in the stocks and calculate the profit/loss of stock options strategies involved.
Call options trading is highly beneficial for a higher turnover and appreciation of investments. Aspiring stock market traders should analyze and understand these factors before paying the premium to buy a call option. The right decision will optimize your earnings and play safely in the bull market.