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LearningUSES FOR CALLS

UNDERSTANDING VOLATILITYUSES FOR PUTS

Darren Krett

Friday, 10 February 2023

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USES FOR CALLS

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1. Long calls are bullish speculation with fixed, limited risk.

In futures options, cach options contract typically represents one underlying future. A long call gives you control (upon exercise) of long 1 future.

A long call position has risk limited to the initial cost of establishing the position. A long call position has unlimited upside potential (as long as the price of the underlying shares keeps rising, the value of the call will keep rising.)

2. Long hedges

The value of a call normally rises as the underlying future price advances in other words it has a bullish bias. The most protection when hedging is found with an in-the-money call because its price will move at a rate similar to that of the price of the underlying. The least protection would be from a call that is far out-of-the-money, because it will not move dollar-for-dollar with the underlying (until the underlying has advanced significantly and it becomes in-the-money).

3. Protect existing short underlying position if a short-term rally is expected.

Gains in the value of the call will tend to offset losses in the short position when prices rise. The total price for this protection is the call premium, which is known when position is initiated.

4. Substitute for existing profitable long underlying position if price setback is expected.

Profitable long underlying position is closed out and the call is bought in its place in order to decrease the risk in the position. The long call position should then participate in any further price rise. The maximum loss in any decline in the future price is then limited to the premium paid for the call.

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UNDERSTANDING VOLATILITYUSES FOR PUTS

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