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Call on a Call

A call on a call is a type of derivative that gives the holder the right, but not the obligation, to purchase another call option on an underlying asset at a predetermined price and date. This "option on an option" strategy is typically used when an investor wants to limit their upfront cost while maintaining the opportunity to profit from a potential rise in the price of the underlying asset.

Example

An investor buys a call on a call option for Company A’s stock, with the right to buy a regular call option on the stock at $100. If the stock price rises above $100, the investor can exercise the call on the call and purchase the regular call option.

Key points

• A call on a call is an option that gives the right to purchase another call option.

• Used to limit upfront costs while maintaining potential upside.

• Provides flexibility to enter the market at a later time if conditions are favorable.

Quick Answers to Curious Questions

It allows investors to limit their initial investment while maintaining the potential to profit from future price increases in the underlying asset.

A call on a call gives the right to buy a call option, while a regular call option gives the right to buy the underlying asset directly.

Investors use this strategy when they want to delay committing fully to a call option while still keeping the opportunity to enter the market if conditions become favorable.