Call Option
Quick Definition
A contract giving the holder the right, but not the obligation, to buy an underlying asset at a specified price within a specified time period.
What Is Call Option?
A call option is a financial contract that gives the buyer (holder) the right to purchase an underlying asset — such as a stock, index, or commodity — at a predetermined price (strike price) on or before a specified date (expiration). The buyer pays a premium to the seller (writer) for this right. Call options increase in value when the underlying asset rises in price. Buyers of calls have unlimited profit potential and risk limited to the premium paid. Sellers of calls collect the premium but face theoretically unlimited risk if the underlying rises significantly. Calls are used for speculation on price increases, hedging short positions, and income generation through covered call writing. They are one of the two fundamental option types alongside put options.
Call Option Example
- 1You buy a $50 call option on XYZ stock for $2. If the stock rises to $60, you can exercise to buy at $50, making $8 profit ($10 gain minus $2 premium)
- 2A portfolio manager buys SPY call options to gain upside exposure without committing the full capital required to buy the ETF shares directly
Related Terms
Put Option
A contract giving the holder the right, but not the obligation, to sell an underlying asset at a specified price within a specified time period.
Strike Price
The predetermined price at which the holder of an option can buy (call) or sell (put) the underlying asset upon exercise.
Options Premium
The price paid by the option buyer to the seller for the rights conveyed by the contract, determined by intrinsic value, time value, and volatility.
Covered Call
An options strategy where an investor sells call options against shares they already own, generating income from the premium while capping upside potential.
American Option
An option contract that can be exercised at any time before or on the expiration date, providing maximum flexibility to the holder.
Futures Contract
A standardized exchange-traded agreement to buy or sell an asset at a predetermined price on a specific future date, with daily mark-to-market settlement.
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