Call Option
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. When the price of the underlying asset rises, the call option buyer profits. 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. Call options can be contrasted with put options, which give the holder the right to sell (forcing the buyer to purchase) the asset at a specified price before or at expiration.
Origin: The concept of call options can be traced back to ancient Greece, but the modern options market began with the establishment of the Chicago Board Options Exchange (CBOE) in 1973. The CBOE's creation marked the beginning of standardized option contracts and centralized trading, making options trading more transparent and regulated.
Categories and Characteristics: Call options can be classified based on different criteria:
- By expiration time: American options and European options. American options can be exercised at any time before the expiration date, while European options can only be exercised on the expiration date.
- By underlying asset: Stock options, bond options, commodity options, etc. Options on different underlying assets have different risk and return characteristics.
- The buyer has the right but not the obligation to purchase.
- The seller must sell the underlying asset if the buyer exercises the option.
- The option premium is the price paid by the buyer to obtain the option.
Specific Cases:
- Case 1: Suppose Investor A buys a call option on Apple Inc. stock with a strike price of $150 and an expiration date three months later. If Apple's stock price rises to $180 at expiration, Investor A can buy the stock at $150 and sell it at the market price of $180, making a profit of $30 per share.
- Case 2: Investor B buys a call option on gold with a strike price of $2000 per ounce and an expiration date one month later. If the price of gold rises to $2100 per ounce at expiration, Investor B can buy gold at $2000 per ounce and sell it at the market price of $2100 per ounce, making a profit of $100 per ounce.
Common Questions:
- Q: If the price of the underlying asset is below the strike price at expiration, will the call option buyer lose money?
A: No. The maximum loss for the call option buyer is the option premium. If the price of the underlying asset is below the strike price, the buyer can choose not to exercise the option, limiting the loss to the premium paid. - Q: What is the difference between a call option and a put option?
A: A call option gives the buyer the right to purchase the asset at a specified price within a specified period, while a put option gives the buyer the right to sell the asset at a specified price within a specified period.
