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Concept of the Day: Call Option Explained
Jan 02, 2025
Concept of the Day:Call Option Explained
What is Call Option?
A Call Option is the right to buy an asset at a specific price on or before a given date. The buyer of the call option is speculating that the price of the asset will go up and is therefore bullish. The call buyer is not obligated to buy the asset if the price falls.
How does a call option work?
Imagine you want to buy shares of a company called XYZ, currently priced at ₹100 each. You believe the price will rise, but you want to limit your upfront investment and risk. You decide to buy a call option as a "price lock-in."
Buying the Call Option: You buy a call option with a strike price of ₹110, paying ₹5 per share for this option. This means you now have the right to buy XYZ shares at ₹110 any time before the option expires in a month.
If the Price Rises: Let’s say XYZ’s price rises to ₹130. With your call option, you can buy shares at ₹110, gaining ₹20 per share (₹130 - ₹110) minus the ₹5 premium you paid. Your net profit is ₹15 per share.
If the Price Falls: If XYZ’s price drops to ₹90, you don’t have to exercise the option as you would not want to buy something at ₹110 that can be bought in the market at ₹90. You can let it expire and only lose the ₹5 you paid for it.
A call option allows you to participate in the upside of a price increase while limiting your loss to the premium paid if the price falls.
Disclaimer: This information is for educational purposes only. Trading in Futures and Options involves substantial risk and is unsuitable for all investors. Past performance is not indicative of future results. Consult a financial advisor before engaging in such trading activities.
Related Keyword
Investing
Options
Call Centre
Put Option
Futures
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