A type of option that gives the buyer the right to purchase something for a set price for a predetermined, finite period. A call represents a bet that the underlying asset (the thing you have the right to buy) will see its price increase.
So say you like shares of Hopefully Going Up Co., which are currently trading at $20 per share. You might buy a call option with a strike price of $25 per share and an expiration one month from now. If a month from now, the stock has risen to $30 per share, you can exercise your option, buy shares at $25 per share, immediately sell them at the going rate of $30 per share and pocket the $5 per-share profit (minus whatever it cost you to purchase the call in the first place).
If shares of Hopefully Going Up Co. sink to $18 per share, you can just let your call option expire. You aren't required to buy the stock. Using call options lets traders make bets without forcing them to buy the underlying asset outright. This lowers the expense of placing the bet, and thus lowers the risk.
The opposite of a call option is a put option. A put gives the right to sell an asset at a certain price during a set period of time. It's a bet that the price of the underlying asset will go down, a way to short the asset.
Related or Semi-related Video
Finance: What is a Strike Price?40 Views
Finance a la shmoop what is a strike price well before going
even a second further with this video be sure you've seen our Steven Spielberg [Introduction to a movie at the cinema directed by Steven Spielberg]
directed what is a stock option video here are the reviews from variety.. well
to review a stock option is the right to buy a share of stock for a set price
over a given period of time so let's say you were granted an option to buy a [Graph of amazon stock prices]
share of Amazon stock in 2015 when the stock was around 400 bucks a share the
option lasts as long as you work at the company in good standing or after 10
years have passed which ever ends first well one day you decide you want another job [Woman signing a contract]
your contract says that if you're no longer an employee with the company then
you have 90 days in which to either buy out your option that is to buy the
option and then own the stock or just forfeit the option [Woman underlining words on a contract]
well since Amazon is now at a thousand bucks a share you obviously don't want
to forfeit the option to buy that share of stock for 400 bucks but you note that
your many friends who joined apcray.com at a high price a high strike price which
creators know they're stock while they're doing a lot of option forfeiting
that is their options ended up being worthless so you've got a lot to think [Man holding out a bag of dog poo]
about here this is Amazon not apcray so you want to buy out your option so
what happens well you were granted your own options at the price Amazon stock [Amazon box falls off shelf]
was trading at the day you joined the company it was 400 bucks a share so
that's a strike price that $400 is the price you pay to buy a share of stock at
some point there in the future that strike price has nothing to do with [Protestors holding signs outside an Amazon building]
unions not working got it? all right well in order to buy that stock it's
currently trading in a thousand bucks a share
you pay Amazon 400 bucks and that buys out your option you then own the stock [Man writing a check to Amazon for 400 dollars]
that's it Amazon cancel your option then they give
you a share of actual stock which you now own for as long as you want to own [Man delivering an Amazon box]
it you can sell it immediately and make a
$600 a share profit that's a thousand bucks a share it's trading at now minus the
$400 strike price you just paid to buy out that option got it or you can hold [Grandparent bribing grand-daughter for amazon stock]
onto those shares and you know use it to bribe your grandchildren one day it's
worth like a million dollars a share
Up Next
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What is a call option? A call option is a type of contract that lets the investor buy shares of a stock at a certain price and within a window of t...