Forex Investment and Currency Trading

Buying a call option (long call)

As the buyer of a call option, you acquire the right, against payment of a premium, to buy a pre-agreed amount of a certain underlying asset at a pre-agreed price. You are, however, not required to exercise the option.

As the buyer of the call, you anticipate rising prices and/or increasing volatility of the underlying asset within the remaining term of the option.

Buying a call option (long call)
Profile of profit or loss on expiry date

• If the price of the underlying asset rises above the strike price plus the option price during the term of the option, then, from the buyer’s perspective, the option reaches the profit zone. Theoretically, the amount of profit is unlimited.
• The risk of a long call position is limited to the loss of the option price paid. A total loss occurs if the price of the underlying asset is below the strike price on the expiry date. In this case, you as the buyer will not exercise the option because you could buy the underlying asset at a lower price on the market.

The higher the strike price, the lower the call premium payable since the less chance there is that the call will reach or exceed the break-even point during the term of the option period.

A long call strategy is suitable for speculative purposes as well as for protecting against rises in the price of an underlying asset which is planned for purchase at a later time. Foreign currency liabilities may also be hedged against rising foreign exchange rates.

Writing a call option (short call)
As the writer (seller) of a call option, you assume the obligation, against receipt of a premium, to deliver a predetermined amount of a certain underlying asset at a pre-agreed price in case the buyer exercises the option.

As the writer of the call, you anticipate that prices will remain flat or slightly fall, and/or that the volatility of the underlying asset will decrease, within the remaining term of the option.

Writing a call option (short call)
Profile of profit or loss on expiry date

In addition to possible applications for speculative purposes, short call strategies are particularly suitable for generating additional income during periods when markets are largely flat.

• If the price of the underlying asset falls below the strike price or, alternatively, if the strike price and the market price of the underlying asset are exactly equal, then it does not make economic sense for the option holder to exercise the option. In this case, you as the writer of the option make a profit equal to the amount of the option price you have already received.
• If the price of the underlying asset rises above the combined strike and option price, the writer of the call option incurs a loss if the option is exercised. In the case of a short call, the amount of the loss is theoretically unlimited.

The higher the strike price, the less likelihood there is of the option being exercised. The amount of the option premium and thus the profit from it is also accordingly lower.

In addition to uses for speculative purposes, the short call strategy is particularly suitable for generating extra income during periods when markets are largely flat.