Introduction to Call Option
A call option is a contract that gives the buyer the rights but not an obligation to buy a commodity, asset or security at a specified price and within a specified time. This commodity or stock is an underlying asset and the specified price is called the strike price.
The specified time within which a sale is to be made is its expiration date before which the buyer has to buy the commodity if he so desires. The commodity through this call option contract can be bought for speculation or sold for income.
The buyer who holds the right to buy such commodities through the call option benefits when the underlying asset increases in price. When the buyer exercises his rights within the specified time, the seller has to sell the asset at the strike price. However, the buyer expects the rise in price and this gives the buyer capital profits.
All you need to know about call options
The call option contract gives the buyer rights to buy over 100 shares of the company at a strike price and before the expiration date. The buyer has to pay a specific price for the call option contract.
The price for the call option is called premium and is to be paid by the call buyer as the price for the rights that he enjoys from the call option contract. If the underlying asset’s price drops below the strike price at the expiration date, the call buyer loses the paid premium. This is considered to be the maximum loss faced by the call buyer.
However, if the price of the underlying asset rises above the strike price, the profit earned by the call buyer is the difference between the strike price and the current price, which is calculated by subtracting the current price from the strike price and premium paid and then multiplied by the number of shares controlled by the call buyer.
Investors often choose to buy the call options if they feel optimistic about the prospects of the underlying assets. If the investor is confident about the company’s shares, they can gain profit by choosing to buy the call options.
