Call Option
What Is a Call Option?
A call option is a financial contract that gives the buyer the right, but not the obligation, to buy an underlying asset at a predetermined price before a specified expiration date. The underlying asset is often a stock, exchange-traded fund (ETF), or index.
Investors use call options when they expect the price of the underlying asset to rise.
Why It Matters
Call options allow investors to gain exposure to potential price increases without purchasing the asset outright. They can also be used in more advanced strategies for speculation, hedging, or income generation.
Because call options can provide leverage, they may increase potential gains, but they also carry significant risk.
How Call Options Work
A call option contract includes:
- the underlying asset
- the strike price
- the expiration date
- the premium paid by the buyer
If the market price rises above the strike price before expiration, the call option may increase in value. The buyer may choose to exercise the option or sell the contract.
Example
An investor buys a call option giving them the right to purchase a stock at $50 per share before expiration. If the stock price rises to $60, the option may become more valuable because the investor can buy the stock below market price.
Call Option vs Put Option
- A call option gives the right to buy an asset.
- A put option gives the right to sell an asset.
FAQs About Call Options
Do call options guarantee profits?
No. If the asset price does not rise enough, the option may lose value or expire worthless.
Why do investors buy call options?
Often to speculate on rising prices or use leverage.
Do investors have to exercise call options?
No. They may also sell the option contract before expiration.
Related Terms
