Introduction To Call Options

WHAT IS AN OPTION?

An option can be defined as a contract which grants the right to the buyer, and does not create any obligation, to buy or sell any underlying asset on or before any certain date at a specified price. Such certain date and specified price are known as the expiration date and strike price. These options are like securities and constitute to be binding contracts with respect to its terms and conditions. Options can broadly be divided into two types, ‘Put Options’ and ‘Call Options’.

Let us understand Call Options today:

What are Call Options?

Call option provides the owner a right to buy an underlying stock at a certain price, known as the strike price and at a certain date, known as the expiration date. To buy a call option, a price in the form of option premium must be paid. Hence, strike price, expiration date and premium are three basic characteristics which define a Call Options. Further, it is on the discretion of the owner to exercise the option as the owner can even let the option expire worthless if the same appears unprofitable. The seller, on the other hand, has an obligation to sell the shares desired by the buyer. One thing that would attract investors towards owing call options is that losses are limited to the option premium, whereas profit is technically unlimited. These call options are like security deposits.