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.
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Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
Up Next
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What is a strike price? Strike prices are used in conjunction with options. Calls and puts give investors the right to buy or sell stocks at predet...