Call options are not structured products per se, but one of the basic element with which structured products are built. The buyer of a call option has the right (but not the obligation) to buy an underlying asset (a stock, a commodity or any other asset) at a predetermined price.
The seller of a call option has the obligation to sell an underlying at a predetermined price if notified to do so by the buyer. The buyer pays a premium to acquire the right to buy, and the seller receives the premium. The height of the premium is fixed according to the strike (if it's lower than the spot (in-the-money), then it's more expensive than if it was higher than the spot (out-of-the-money)), the time to maturity (the longer the more expensive), the volatility (the higher, the more expensive). Call options provide leverage. Depending on the option's strike, for a 1% rise or fall in the underlying asset’s price, the call option will rise or fall by a multiple. Call options expire either in-the-money, in which case they will be worth Spot - Strike, or out-of-the-money, in which case they will be worth zero. Call options are highly speculative instruments.
The buyer cannot loose more than he invested, whereas the seller's profit is limited to the cashed-in premium, but the latter’s loss potential is unlimited. Buyers profit when the value of the underlying asset rises, while sellers lose. The breakeven for a buyer is reached, when the price of the underlying rises by the cost of the premium.
Long (left) and short (right) call option payoff
- Buy call options when your scenario for the underlying asset is strongly positive, the volatility low (or expected to increase).
- Carefully choose the time to maturity: if your forecasted scenario only materializes after the option expires, it will be worthless to you.
- Buy calls when the volatility of the underlying is low and / or you expect it to rise.
- Watch the liquidity of your call: it is not unusual to see large spreads in small caps. If necessary, work with limits.
- Check the market often. Call options are usually very time-sensitive, and good timing is essential to enter and exit.
- Never, ever sell call options, if you have not the financial strength to support a loss which can rise to a multiple of the money you have invested.
- Don't buy or sell a call before you have clearly evaluated the risk.
- Don't overinvest. Calls are speculative instruments and you must be ready to lose all (or more if you go short) the money you invested.