Buying Call Option Contracts

Oct 13, 2025 by magicalceylontours.com 69 views

Understanding Call Options: A Case Study of Mrs. Arora's Investment in ITC

In the world of finance, options trading is a popular strategy used by investors to manage risk and potentially earn higher returns. One type of option is the call option, which gives the buyer the right to purchase an underlying asset at a predetermined price (strike price) before a certain date (expiration date). In this article, we will explore a case study of Mrs. Arora's investment in ITC using call options.

Mrs. Arora is a seasoned investor who has been following the stock market for years. She has a keen eye for opportunities and is always on the lookout for potential gains. Recently, she has been bullish about ITC, a leading cigarette manufacturer in India, which trades in the spot market at Rs. 510. She believes that the company's strong brand presence and growing demand for its products will drive the stock price higher in the coming months.

Buying Call Option Contracts

To take advantage of her bullish view on ITC, Mrs. Arora decides to buy three-month call option contracts on ITC with a strike price of Rs. 530 at a premium of Rs. 1.05 per call. This means that she is paying Rs. 1.05 for the right to buy 1000 shares of ITC at Rs. 530 before the expiration date. The total cost of the call option contract is Rs. 1050 (1000 shares x Rs. 1.05 per share).

Three Months Later

Three months later, ITC closes at Rs. 550, which is higher than the strike price of Rs. 530. Mrs. Arora's call option contract is now in the money, meaning that she can exercise her right to buy 1000 shares of ITC at Rs. 530 and sell them at the current market price of Rs. 550, earning a profit of Rs. 20 per share.

Calculating the Profit

To calculate the profit, we need to subtract the cost of the call option contract from the profit earned from exercising the option. The profit earned from exercising the option is Rs. 20 per share x 1000 shares = Rs. 20,000. The cost of the call option contract is Rs. 1050. Therefore, the net profit is Rs. 20,000 - Rs. 1050 = Rs. 19,950.

In conclusion, Mrs. Arora's investment in ITC using call options has yielded a significant profit of Rs. 19,950. This case study highlights the potential benefits of using call options to manage risk and potentially earn higher returns. However, it is essential to note that options trading involves risk, and investors should carefully consider their investment goals, risk tolerance, and market conditions before making any investment decisions.

Call options give the buyer the right to purchase an underlying asset at a predetermined price (strike price) before a certain date (expiration date).
Mrs. Arora's investment in ITC using call options has yielded a significant profit of Rs. 19,950.
Options trading involves risk, and investors should carefully consider their investment goals, risk tolerance, and market conditions before making any investment decisions.

What is a Call Option?

A call option is a contract that gives the buyer the right to purchase an underlying asset at a predetermined price (strike price) before a certain date (expiration date).

How to Buy a Call Option Contract?

To buy a call option contract, you need to:

Choose the underlying asset (stock, commodity, etc.)
Determine the strike price and expiration date
Pay the premium (cost) of the call option contract
Exercise the option to buy the underlying asset at the strike price

What is the Premium of a Call Option Contract?

The premium of a call option contract is the cost of buying the option. It is usually expressed as a percentage of the strike price.

What is the Expiration Date of a Call Option Contract?

The expiration date of a call option contract is the last day on which the option can be exercised.

What is the Strike Price of a Call Option Contract?

The strike price of a call option contract is the predetermined price at which the underlying asset can be purchased.

What is the Underlying Asset of a Call Option Contract?

The underlying asset of a call option contract is the asset that can be purchased using the option.

What is the Premium of a Call Option Contract?

The premium of a call option contract is the cost of buying the option. It is usually expressed as a percentage of the strike price.

What is the Expiration Date of a Call Option Contract?

The expiration date of a call option contract is the last day on which the option can be exercised.

What is the Strike Price of a Call Option Contract?

The strike price of a call option contract is the predetermined price at which the underlying asset can be purchased.

What is the Underlying Asset of a Call Option Contract?

The underlying asset of a call option contract is the asset that can be purchased using the option.

Calculating the Profit from a Call Option Contract

To calculate the profit from a call option contract, you need to:

Determine the profit earned from exercising the option
Subtract the cost of the call option contract from the profit earned

Example of Calculating the Profit from a Call Option Contract

Suppose you buy a call option contract on ITC with a strike price of Rs. 530 at a premium of Rs. 1.05 per share. Three months later, ITC closes at Rs. 550. To calculate the profit, you need to:

Determine the profit earned from exercising the option: Rs. 20 per share x 1000 shares = Rs. 20,000
Subtract the cost of the call option contract from the profit earned: Rs. 20,000 - Rs. 1050 = Rs. 19,950

Conclusion

In conclusion, call options can be a powerful tool for managing risk and potentially earning higher returns. However, it is essential to carefully consider your investment goals, risk tolerance, and market conditions before making any investment decisions.