What Is a Call Option?
A call option is a financial contract that gives the holder the right, but not the obligation, to buy an underlying asset at a specified price on or before a set expiration date.
Definition
A call option is an options contract that grants the buyer the right to purchase an underlying asset at a predetermined price, known as the strike price, within a specified time period. The buyer is not required to exercise this right.
Call options are commonly written on assets such as stocks, bonds, commodities, or other financial instruments. The contract expires on a defined expiration date.
How It Works
A call option specifies four key elements: the underlying asset, the strike price, the expiration date, and the option premium. The premium is the price paid to acquire the option.
If the underlying asset’s market price exceeds the strike price before expiration, the option has intrinsic value. If it does not, the option may expire without value.
Why the Term Matters
Call options are a foundational concept in options markets and derivatives pricing. They help explain how market participants express expectations about future price movements and how contractual rights are structured.
Understanding call options is essential for interpreting options pricing, market activity, and risk exposure in derivatives markets.
Related Concepts
- Put option
- Strike price
- Expiration date
- Option premium
- Underlying asset
- Options contract
FAQs
What is a call option?
A call option is a contract that gives the holder the right to buy an underlying asset at a specified price before a set expiration date.
Is exercising a call option mandatory?
No, exercising a call option is optional and depends on market conditions.
What is the strike price in a call option?
The strike price is the predetermined price at which the underlying asset can be purchased.
What happens if a call option expires out of the money?
The call option expires without value if the underlying asset’s price does not exceed the strike price.
What assets can call options be written on?
Call options can be written on stocks, bonds, commodities, and other financial instruments.
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