An investor who anticipates a rise in the value of a particular stock but does not want to commit all of the capital needed to purchase the stock. Buying a call is a simple and popular option strategy. Although buying calls may not be suitable for everyone, it allows the investor the opportunity to profit from an upward move in the underlying stock while having very little capital at risk compared to the amount needed to own the stock. To help investors become proficient call buyers and to reduce the likelihood of choosing the wrong strike price investors should become familiar with some of the terminology relating to call buying. Though the nomenclature in the options industry can be intimidating, there are four useful terms that the active call buyer should be aware of.
Options provide an important tool for limiting risk and increasing opportunities.
One investment strategy that illustrates this statement is buying calls rather than buying stock. This alternative investment strategy can be utilized if an investor has a bullish opinion on a stock and wants to participate in the expected upward price movement. Call buyers are drawn to this strategy because of the potential to acquire significant profits with a pre-determined amount of risk. While there are many benefits to call buying, the attraction of unlimited profit potential and limited risk will often lead the novice investor into disappointing results. These disappointing results often occur because of misunderstood call buying decisions.