A call is a contract that gives you the right to buy an underlying asset at a specific price. Call options increase in value as the underlying asset increases in value. It is the opposite of a put contract.
When you buy a call, you are purchasing the right (paying someone else) to buy the underlying asset at a specific price later. With flash swap, you don’t actually need the cash to purchase the asset later. You can profit from the in the money option and exercise it cashless-ly
Vitalik purchases one Ethereum call option (ETH) on Feb 05 with a $1000 strike price for a $65 premium price. The call option expires on Feb 12. Vitalik sees that Ethereum’s price has skyrocketed to $1500, well above the strike price before the call expires.
Vitalik decides to exercise the contract. He uses his right to buy ETH at $1500. This pockets him a $1500 - $1000 - $65 = $435 profit from a $65 initial investment.
If the price had not gone above $1000, Vitalik would have only lost the $65 premium. Which he can easily regain by flipping Ethereum, should he be an ETH holder.
Buying a call is a bullish strategy. It is a great way to get greater returns when you feel bullish on a cryptocurrency and think the price will moon, as it is a leveraged position.
A call option helps reduce the maximum loss you may incur as an investor. Unlike actually owning the cryptocurrency where you can theoretically lose 100% of your investment, you can only lose the premium you paid when you bought a call. It’s a great strategy for risky moonshots.
Buying a call option is also a sound strategy to protect you from impermanent loss. A problem when providing liquidity on Uniswap is that you get left behind when the token moons. Buying a call ensures you don’t get left behind.
If your position expires, then you lose the right to exercise your option.
When you sell a call, you sell a contract to another party. In doing so, you grant the other party the right to sell the underlying asset at a certain price to you. You can always get out of your obligation by buying back your put.
Example selling a call
Vitalik sells one Ethereum call option (ETH) on Feb 05 with a $1000 strike price for a $45 premium price. As the call option expires on Feb 12, ETH has never gone above the $1000 strike price. Vitalik keeps the premium price and made a $45 profit.
If the price had risen above $1000, the other party could have exercised the call, and Vitalik would have had to sell the Ethereum for $1000.
Selling a call a put is a bearish strategy. It is a great way for you to get instant upfront income as you are guaranteed the premium you were paid.
Selling a call is a great new way to lock tokens, build trust, and get funding for projects. We call it Initial Options Offering (IOO). By locking up the tokens and selling calls at set price milestones, the team can earn premiums for short term funding. At the same time, the community gets to buy the best calls straight from the team.
If your position expires, you can either roll your position to a new option (basically sell a call again) or return the expired call. By returning the call, your asset or payment escrow will be returned to you.
As a buyer, your call is considered “in the money” when the underlying asset's price is more than the strike price. Calls are considered “out of the money” when the asset's price is lower than the strike price. And of course, Calls are “at the money” when the asset's price equals the strike price. Thus extrinsic value exceeds 0 only when the asset price < strike price.
When you buy a call you want the price to go up. You are bullish. When you sell a call, you want the price to go down. You are bearish.