When to use Calls Options

Call options benefit buyers when the price of the underlying stock raises above the strike or exercise price.

The example in the preceding section, shows that if an investor bought a call option instead of a stock the larger percentage of the return would be due to the sales of the option. Due to the leverage concept if the stock market price falls below the strike price of the option the most the investor would lose would be the option premium.

Call options can also be used as a hedge when there is an upturn on prices of stock in a short position. Assuming that an investor has sold 100 shares of Merck´s stock when these were at $80 per share. When Merck´s price drops to $69 per share the investor would want to protect his $11 profits per share against price raise in Mercks stocks.

The investor could buy a call option that would have a strike price of $70 per share for each increase of $1 in the Merck stock that is over $70 per share, there is a profit in the call option that offsets the loss on the short sale.

However, if the price of Merck stock continues to fall the investor will only lose the amount paid for the buying of the option. This strategy allows the investor to protect its earnings without having to close out his position.