Business, Legal & Accounting Glossary
A call option is an option contract that gives the owner (also called the buyer or holder) the right to buy (or “call”) a fixed amount of an underlying security at a stated price within a specified period of time. The owner of a call option has the right to call the security away from the option writer (seller) at a fixed price called the exercise or strike price. The writer of the call option is obligated to sell the security at a fixed price to the option holder if the holder of the call option chooses to exercise the call. An investor who is long a call option has the right to buy the underlying security, while an investor who is short a call option has an obligation to sell that security. A call option holder who exercises the call option will receive 100 shares of the underlying security.
Purchasing a call option entitles the owner to purchase a specific quantity of the underlying product at a set price, referred to as the strike price, during a specified time period. For instance, you may acquire a call option on 100 shares of a stock if you anticipate the stock’s price increasing but do not wish to commit your investment principle to the stock. If the stock price increases, the call option’s value increases as well. You can either sell your option at a profit or exercise it and purchase the underlying stock at the strike price. However, if the stock price is less than the strike price at expiration, the option is worthless. In that instance, you lose the premium you paid to purchase the option, plus any brokerage fees. In comparison, you can sell a call option, a process referred to as writing a call. This grants the buyer the right to purchase the underlying investment from you at the strike price prior to the expiration of the option. If you write a call, you are required to sell the underlying asset if the option is exercised and you are assigned to fulfil the call.
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This glossary post was last updated: 5th April, 2022 | 0 Views.