What is a call option

What is a call option

What is a call option

A call option is a contractual arrangement in which an investor, in return for a premium, has the right to buy an asset at a specified strike price on or prior to a specified date.Call options are financial contracts that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity, or other asset or instrument at a specified price within a specific time period. The stock, bond, or commodity is called the underlying asset. A call buyer profits when the underlying asset increases in price.



For example, a single-call option contract may give a holder the right to buy 100 shares of Apple stock at $100 up until the expiry date in three months. There are many expiration dates and strike prices for traders to choose from. As the value of Apple stock goes up, the price of the option contract goes up, and vice versa. The call option buyer may hold the contract until the expiration date, at which point they can take delivery of the 100 shares of stock or sell the options contract at any point before the expiration date at the market price of the contract at that time.

You're only out the premium if you decideFor example, if Apple is trading at $110 at expiry, the option contract strike price is $100, and the options cost the buyer $2 per share, the profit is $110 - ($100 +$2) = $8. If the buyer bought one options contract, their profit equates to $800 ($8 x 100 shares); $1,600 if they bought two contracts ($8 x 200).Covered calls work because if the stock rises above the strike price, the option buyer will exercise their right to buy the stock at the lower strike price. This means the option writer doesn't profit from the stock's movement above the strike price. The options writer's maximum profit on the option is the premium received. (Source: www.investopedia.com)



Related Articles