Call Option
Definition:
A call option is an option contract that gives the buyer the right, but not the obligation, to purchase an asset at a specified price (strike price) on or before a specified date (expiration date).
Key Features:
- Right to purchase: The buyer has the right to purchase the asset at the strike price, but is not obligated to do so.
- Expiration date: The date on which the option expires and the buyer’s rights cease.
- Strike price: The specified price at which the asset can be purchased.
- Premium: The price paid by the buyer for the option.
- Underlying asset: The asset in which the option is written.
- Delta: The change in the option price in response to a change in the price of the underlying asset.
- Gamma: The change in the delta of an option in response to a change in the price of the underlying asset.
Uses:
- Hedge against potential price increases: Investors can buy call options to protect against potential price increases in an asset.
- Speculation: Traders can speculate on an asset’s price movement by buying call options.
- Leverage: Call options can be used to leverage a position, increasing potential returns but also the risk of losses.
Types of Call Options:
- Cash-settled: The buyer pays a premium and receives a payment or the asset if the option is exercised.
- Stock-settled: The buyer receives shares of the underlying asset if the option is exercised.
- Binary: An option with a limited payoff structure, where the buyer receives a fixed amount of money if the asset reaches the strike price.
Examples:
- You buy a call option on a stock at a strike price of $50 for a premium of $5. If the stock price rises to $60, you can exercise the option and purchase the stock for $50.
- A trader buys a call option on a commodity with a strike price of $1,000. If the commodity price rises to $1,200, the trader can exercise the option and purchase the commodity at $1,000.
FAQs
What is a put option and call option?
A call option gives the buyer the right (but not the obligation) to purchase an asset at a specified price within a certain time frame. A put option gives the buyer the right (but not the obligation) to sell an asset at a specified price within a certain time frame.
What is a call and put option with an example?
A call option example: An investor buys a call option to purchase stock at $50 per share within the next three months. If the stock price rises to $60, the investor profits.A put option example: An investor buys a put option to sell stock at $50 per share. If the stock price falls to $40, the investor can sell at $50, profiting from the difference.
What is a real example of options trading?
Suppose an investor expects a stock’s price to rise. They buy a call option for $5 to purchase 100 shares at $100 each. If the stock rises to $120, they can buy the stock at $100, making a profit, minus the initial $5 paid for the option.
What is F&O with an example?
F&O stands for Futures and Options, which are financial derivatives. For example, in an F&O trade, an investor might buy a call option (Option) or agree to buy an asset in the future at a specific price (Futures).
