Call Options

Understanding Call Options

Call options are financial contracts that give the purchaser the right, but not the obligation, to buy a specific asset, such as a stock, bond, or commodity, at a predetermined price within a specified period of time. The underlying asset, whether it is a stock, bond, or commodity, serves as the basis for the option.

The predetermined price is known as the strike price, while the time period in which the purchase can be made is called the expiration time. Call options can be acquired for speculative purposes or sold to generate income. They can also be used in conjunction with other strategies, such as spread strategies.

For example, let’s consider a situation where an investor holds a single call option contract that gives them the right to buy 50 shares of a company at a price of $10 per share within a four-month expiration period. Investors have the flexibility to choose from different expiration dates and strike prices. As the value of the company’s shares increases, the price of the option contract also increases.

The purchaser of the call option has the choice to hold onto the contract until the expiration date or sell it at any point before then at the current market price. Alternatively, they can decide to wait until the expiration date and receive the 50 shares of stock.