What is Call Option?
987 reads · Last updated: December 5, 2024
Call options are financial contracts that give the buyer the right—but not the obligation—to buy a stock, bond, commodity, or other asset or instrument at a specified price within a specific period. A call seller must sell the asset if the buyer exercises the call.A call buyer profits when the underlying asset increases in price. The seller profits from the premium if the price drops below the strike price at expiration because the buyer will typically not execute the option.A call option may be contrasted with a put option, which gives the holder the right to sell (force the buyer to purchase) the asset at a specified price on or before expiration.
Definition
A call option is a financial contract that gives the buyer the right, but not the obligation, to purchase stocks, bonds, commodities, or other assets or instruments at a specified price within a specified period. If the buyer exercises the call option, the seller must sell the asset. The call option buyer profits when the underlying asset's price rises. If the price falls below the strike price at expiration, the call option seller profits from the option premium, as the buyer typically will not exercise the option.
Origin
The concept of options dates back to ancient Greece, but the modern options market began with the establishment of the Chicago Board Options Exchange (CBOE) in 1973. This marked the start of standardized options contracts, making options trading more widespread and regulated.
Categories and Features
Call options are primarily divided into American and European types. American call options allow the holder to exercise the right at any time before the expiration date, while European call options can only be exercised on the expiration date. American options offer greater flexibility but are usually more expensive. Key features of call options include the strike price, expiration date, and option premium. The strike price is the price at which the buyer can purchase the underlying asset, the expiration date is the validity period of the option contract, and the option premium is the price paid by the buyer to acquire the option.
Case Studies
Case Study 1: Apple Inc. call options. Suppose an investor buys a call option for Apple stock in January 2024 with a strike price of $150 and an expiration date in December 2024. If Apple's stock price rises to $180 at expiration, the investor can purchase the stock at $150, thus making a profit. Case Study 2: Tesla Inc. call options. An investor buys a call option for Tesla stock at the beginning of 2024 with a strike price of $600 and an expiration date in December 2024. If Tesla's stock price is only $550 at expiration, the investor may choose not to exercise the option, losing the option premium.
Common Issues
Common issues investors face when using call options include misunderstandings about option pricing and incorrect assessments of market volatility. Option pricing is influenced by various factors such as the underlying asset price, volatility, and time value. Investors need to understand these factors to make informed investment decisions. Additionally, market volatility can lead to rapid changes in option value, requiring investors to have a risk management strategy.
