Call option

A call option, often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option. The buyer of the call option has the right, but not the obligation, to buy an agreed quantity of a particular commodity or financial instrument (the underlying) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). The seller (or "writer") is obligated to sell the commodity or financial instrument to the buyer if the buyer so decides. The buyer pays a fee (called a premium) for this right.

When you buy a call option, you are buying the right to buy a stock at the strike price, regardless of the stock price in the future before the expiration date. Conversely, you can short or "write" the call option, giving the buyer the right to buy that stock from you anytime before the option expires. To compensate you for that risk taken, the buyer pays you a premium, also known as the price of the call. The seller of the call is said to have shorted the call option, and keeps the premium (the amount the buyer pays to buy the option) whether or not the buyer ever exercises the option.

For example, if a stock trades at $50 right now and you buy its call option with a $50 strike price, you have the right to purchase that stock for $50 regardless of the current stock price as long as it has not expired. Even if the stock rises to $100, you still have the right to buy that stock for $50 as long as the call option has not expired. Since the payoff of purchased call options increases as the stock price rises, buying call options is considered bullish. When the price of the underlying instrument surpasses the strike price, the option is said to be "in the money". On the other hand, If the stock falls to below $50, the buyer will never exercise the option, since he would have to pay $50 per share when he can buy the same stock for less. If this occurs, the option expires worthless and the option seller keeps the premium as profit. Since the payoff for sold (or written) call options increases as the stock price falls, selling call options is considered bearish.

All call options have the following three characteristics:

The initial transaction in this context (buying/selling a call option) is not the supplying of a physical or financial asset (the underlying instrument). Rather it is the granting of the right to buy the underlying asset, in exchange for a fee — the option price or premium.

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