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.