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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.

A call option is a financial contract between two parties, the buyer and the seller of this type of option. 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). 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. In law, an option is the right to convey a piece of property. ... Image File history File links CallOption. ... Image File history File links CallOption. ... Image File history File links CallWrite. ... Image File history File links CallWrite. ... This article is about options traded in financial markets. ... This article does not cite any references or sources. ... Financial instruments package financial capital in readily tradeable forms - they do not exist outside the context of the financial markets. ... In finance, an underlying is an investment from which a derivative security is derived. ... The strike price, or exercise price, is a key variable in a derivatives contract between two parties. ...

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). Rather it is the granting of the right to buy the underlying asset, in exchange for a fee - the option price or premium. In finance, an underlying is an investment from which a derivative security is derived. ...

Exact specifications may differ depending on option style. A European call option allows the holder to exercise the option (i.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 be exercised. ... The style or family of a financial option is a general term denoting the class into which the option falls, usually defined by the manner in which the option may be exercised. ... The style or family of a financial option is a general term denoting the class into which the option falls, usually defined by the manner in which the option may be exercised. ...

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. A tradeable call option should not be confused with either Incentive stock options or with a warrant. 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. 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. An interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring his consumption, by lending to the borrower. ... Interest rate cap An interest rate cap is a series of European call options or caplets on a specified interest rate, usually the LIBOR interest rate. ... GOLD refers to one of the following: GOLD (IEEE) is an IEEE program designed to garner more student members at the university level (Graduates of the Last Decade). ... Pumpjack pumping an oil well near Sarnia, Ontario Petroleum (from Greek petra – rock and elaion – oil or Latin oleum – oil ) or crude oil is a thick, dark brown or greenish liquid. ... Incentive stock options (ISOs), are a type of employee stock option that can be granted only to employees and confer a U.S. tax benefit. ... For other uses of the term Warrant, see Warrant (disambiguation) 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 much higher than the stock price at time of issue. ... For other uses, see Stock (disambiguation). ... A treasury stock or reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market (open market including insiders holdings). ...

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' (Call Buyer) purchases a Call contract to buy 100 shares of XYZ Corp from 'Trader B' (Call Writer) at $50_/share. The current price is $45_/share, and 'Trader A' pays a premium of $5_/share. If the share price of XYZ stock rises to $60_/share right before expiration, then 'Trader A' can exercise the call by buying 100 shares for $5,000 from 'Trader B' and sell them at $6,000 in the stock market.

 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 

• If, however, the price of XYZ drops to $40_/share below the strike price, then 'Trader A' would not exercise the option. (Why buy a stock from 'Trader B' at 50, the strike price when it can be bought at $40 in the stock market?). Trader A's option would be worthless and the whole investment, the fee (premium) for the option contract, $500 (5_/share, 100 shares per contract). Trader A's total loss is limited to the cost of the call premium plus the sales commission to buy it.

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). Since the option will not be exercised unless it is "in-the-money", the payoff for a call option is The spot price of a commodity or a security or a currency is the price that is quoted for settlement (payment and delivery) of the transaction immediately. ... In finance, moneyness is a measure of the degree to which a derivative security is likely to have positive monetary value at its expiration. ...

max[(S − K);0] or formally,

where

Prior to exercise, the option value, and therefore price, varies with the underlying price and with time. 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. The science of determining this value is the central tenet of financial mathematics. The most common method is to use the Black-Scholes formula. 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. Volatility most frequently refers to the standard deviation of the change in value of a financial instrument with a specific time horizon. ... Mathematical finance is the branch of applied mathematics concerned with the financial markets. ... The Black-Scholes model, often simply called Black-Scholes, is a model of the varying price over time of financial instruments, and in particular stocks. ...

See also

Payoffs and profits from buying stock and writing a call. ... In finance, moneyness is a measure of the degree to which a derivative security is likely to have positive monetary value at its expiration. ... The introduction to this article provides insufficient context for those unfamiliar with the subject matter. ... A naked put is a put option where the option writer does not have a short position in the stock. ... This article is about options traded in financial markets. ... Option Value In finance, the value of an option consists of two components, its intrinsic value and its time value. ... 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 be exercised. ... A put option (sometimes simply called a put) is a financial contract between two parties, the buyer and the writer of the option. ... In financial mathematics, put-call parity defines a relationship between the price of a European call option and a European put option - both with the identical strike price and expiry. ... Right of first refusal is the right to make an offer before offers from others are considered. ... A binary option is a type of option where the payoff is either some fixed amount of some asset or nothing at all. ... A bond option is similar to a stock option with the difference that the underlying asset is a bond. ... In finance, a default option or credit default option is a put option that makes a payoff in the event the issuer of a specified reference asset defaults. ... An interest rate derivate is a derivative security where the underlying asset is the right to pay or receive a (usually notional) amount of money at a given interest rate. ... In finance, a foreign exchange option (commonly shortened to just FX option or currency option) is a derivative financial instrument where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. ... // Interest rate cap An interest rate cap is a derivative in which the buyer receives money at the end of each period in which an interest rate exceeds the agreed strike price. ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... Main article: Option A stock option is a specific type of option that uses the stock itself as an underlying instrument to determine the options pay-off (and therefore its value). ... To meet Wikipedias quality standards, this article or section may require cleanup. ... For other uses of the term Warrant, see Warrant (disambiguation) 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 much higher than the stock price at time of issue. ...

External links

• Read More About Call Options At, OptionTradingpedia.com
• Call Option vs. Long Position, Quick introduction to benefits & drawbacks of investing using call options vs. long positions
• Disk Lectures, Options I audio lecture with slideshow
• Investopedia, Options tutorial