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This article is about financial options. For call options in general, see Option (law). In Law, an option is the right to convey a piece of Property.
Buying a call option - This is a graphical interpretation of the payoffs and profits generated by a call option from the buyer 's perspective. The higher the stock price the higher the profit. Eventually, the price of the underlying security would become high enough to fully compensate for the price of the option.
Buying a call option - This is a graphical interpretation of the payoffs and profits generated by a call option from the buyer 's perspective. The higher the stock price the higher the profit. Eventually, the price of the underlying security would become high enough to fully compensate for the price of the option.
Writing a call option - This is a graphical interpretation of the payoffs and profits generated by a call option from the writer 's perspective of the option. Profit is maximized when the strike price exceeds the price of the underlying security, because the option expires worthless and the writer keeps the premium.
Writing a call option - This is a graphical interpretation of the payoffs and profits generated by a call option from the writer 's perspective of the option. Profit is maximized when the strike price exceeds the price of the underlying security, because the option expires worthless and the writer keeps the premium.

A call option is a financial contract between two parties, the buyer and the seller of this type of option. Options are financial instruments that convey the right but not the obligation to engage in a future transaction on some Underlying security, or in a Futures Often it is simply labeled a "call". The buyer of the option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying instrument) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). A commodity is anything for which there is demand but which is supplied without qualitative differentiation across a market Financial instruments are cash evidence of an ownership interest in an entity or a contractual right to receive or deliver cash or another financial instrument In finance the underlying of a derivative is an Asset, basket of assets, index, or even another derivative such that the cash flows of the In options, the strike price, or exercise price is a key variable in a derivatives contract between two parties The seller (or "writer") is obligated to sell the commodity or financial instrument should the buyer so decide. The buyer pays a fee (called a premium) for this right.

The buyer of a call option wants the price of the underlying instrument to rise in the future; the seller either expects that it will not, or is willing to give up some of the upside (profit) from a price rise in return for the premium (paid immediately) and retaining the opportunity to make a gain up to the strike price (see below for examples).

Call options are most profitable for the buyer when the underlying instrument is moving up, making the price of the underlying instrument closer to the strike price. When the price of the underlying instrument surpasses the strike price, the option is said to be "in the money".

The initial transaction in this context (buying/selling a call option) is not the supplying of a physical or financial asset (the underlying instrument). In finance the underlying of a derivative is an Asset, basket of assets, index, or even another derivative such that the cash flows of the Rather it is the granting of the right to buy the underlying asset, in exchange for a fee - the option price or premium.

Exact specifications may differ depending on option style. In finance the style or family of an option is a general term denoting the class into which the option falls usually defined by the dates on which the option may A European call option allows the holder to exercise the option (i. In finance the style or family of an option is a general term denoting the class into which the option falls usually defined by the dates on which the option may e. , to buy) only on the option expiration date. An American call option allows exercise at any time during the life of the option. In finance the style or family of an option is a general term denoting the class into which the option falls usually defined by the dates on which the option may

Call options can be purchased on many financial instruments other than stock in a corporation. Options can be purchased on futures on interest rates, for example (see interest rate cap), and on commodities like gold or crude oil. Interest is a fee paid on borrowed capital Assets lent include Money, Shares, Consumer goods through Hire purchase, major assets Interest rate cap An interest rate cap is a derivative in which the buyer receives payments at the end of each period in which the interest rate exceeds the agreed Gold (ˈɡoʊld is a Chemical element with the symbol Au (from its Latin name aurum) and Atomic number 79 Petroleum ( L petroleum, from Greek πετρέλαιον, lit A tradeable call option should not be confused with either Incentive stock options or with a warrant. Incentive stock options (ISO's are a type of Employee stock option that can be granted only to employees and confer a U In Finance, a warrant is a security that entitles the holder to buy stock of the company that issued it at a specified price which is usually higher than the stock An incentive stock option, the option to buy stock in a particular company, is a right granted by a corporation to a particular person (typically executives) to purchase treasury stock. Software for Fixed assets management and Stock control developed in 2004. A treasury stock or reacquired stock is Stock which is bought back by the issuing Company, reducing the amount of Outstanding stock on the When an incentive stock option is exercised, new shares are issued. Incentive stock options are not traded on the open market. In contrast, when a call option is exercised, the underlying asset is transferred from one owner to another.

Example of a call option on a stock

Buy a call:   The buyer expects that the price may go up.  
              The buyer pays a premium that he will never get back. 
              He has the right to exercise the option at the strike price. 

Write a call: The writer receives the premium. 
              If the buyer decides to exercise the option, then
              the writer has to sell the stock at the strike price. 
              If the buyer does not exercise the option, then
              the writer profits the premium. 

Trader A's total earnings (S) can be calculated at $500.  
 Sale of 100 stock at $60 = $6,000 (P)
 Amount paid to 'Trader B' for the 100 stock bought at strike price of $50 = $5,000 (Q)
 Call Option premium paid to Trader B for buying the contract of 100 shares @ $5/share, excluding commissions = $500 (R)
 
 S=P-(Q+R)=$6,000-($5,000+$500)=$500


This example illustrates that a call option has positive monetary value when the underlying instrument has a spot price (S) above the strike price (K). The spot price or spot rate of a Commodity, a security or a Currency is the Price that is quoted for immediate (spot settlement Since the option will not be exercised unless it is "in-the-money", the payoff for a call option is

max[(S − K);0] or formally, \,(S-K)^{+}
where (x)^+ =\{^{x\ if\ x\geq 0}_{0\ otherwise}

Prior to exercise, the option value, and therefore price, varies with the underlying price and with time. "In the money" redirects here for the poker term see In the money (poker. The call price must reflect the "likelihood" or chance of the option "finishing in-the-money". The price should thus be higher with more time to expiry (except in cases when a significant dividend is present) and with a more volatile underlying instrument. Volatility most frequently refers to the Standard deviation of the continuously compounded returns of a Financial instrument with a specific time horizon The science of determining this value is the central tenet of financial mathematics. Mathematical finance is the branch of Applied mathematics concerned with the Financial markets. The most common method is to use the Black-Scholes formula. The term Black–Scholes refers to three closely related concepts The Black–Scholes model is a mathematical model of the market for an equity in which the equity's Whatever the formula used, the buyer and seller must agree on the initial value (the premium), otherwise the exchange (buy/sell) of the option will not take place.

See also

Options

External links

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