Call

DEFINITION of call

Call is a type of option that gives the buyer the right, but not the obligation, to buy a certain market at a certain price, before its expiry date. Certain price means the strike price.

WHAT IT IS IN ESSENCE

A call option is an option contract in which the holder (buyer) has the right (but not the obligation) to buy a specified quantity of a security at a specified price (strike price) within a fixed period of time (until its expiration). For stock options, each contract covers 100 shares. A call is a type of option that gives the buyer the right, but not the obligation, to buy a certain market at a certain price, known as the strike price, before its expiry date.

Call options allow traders to profit if an asset’s price growth beyond a specified point within a specified time. They are the opposite of put options, which allow traders to profit if an asset’s price reduced beyond a certain point within a predefined period of time.

A call option works by guaranteeing a price at which you can purchase the underlying asset until your set expiry date. It is different from the futures because you don’t have to buy the asset if the trade never earns a profit. Instead, if the asset’s price never exceeds the strike price of your option, you can leave it to expire and lose only what you paid for the option in the first place. This is known as the premium.

If the asset’s price does exceed the strike price, you can fill your option by buying the asset for less than its current market value.

HOW TO USE

Investors buy calls when they think the share price of the underlying security will rise. Also, they sell a call if they think it will fall. Selling an option also means to ”write” some option.

Call options have various strike prices which give you multiple choices for trading. The strike price is the price at which the underlying asset is to buy or sell when the option is exercised. For the option buyer to start making a profit, the market price of the underlying asset also known as spot price must go above for calls.