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Call Option

A call option is a financial contract that gives the buyer the right, but not the obligation, to purchase a specific quantity of an underlying asset (such as a stock) at a predetermined price (the strike price) within a specified time frame. The buyer of a call option profits if the price of the underlying asset rises above the strike price before the option expires. The seller of the call option, known as the writer, receives a premium for selling the option but is obligated to sell the underlying asset at the strike price if the buyer exercises the option.

Example

An investor buys a call option to purchase 100 shares of XYZ stock at a strike price of $50, expiring in three months. If the stock price rises to $60, the investor can exercise the option and buy the shares at $50, potentially selling them at the market price for a profit.

Key points

• A call option gives the buyer the right to purchase an asset at a set price within a specified time.

• Buyers profit if the underlying asset’s price rises above the strike price.

• Sellers receive a premium but are obligated to sell the asset if the option is exercised.

Quick Answers to Curious Questions

An investor buys a call option when they believe the price of the underlying asset will rise above the strike price before the option expires.

The seller risks having to sell the underlying asset at a lower price than the market value if the option is exercised, while their maximum gain is the premium received.

If the option expires without being exercised, the buyer loses the premium paid, and the seller keeps the premium.