What is a call option?
A call option gives you the right, but not the requirement, to purchase a stock at a specific price (known as the strike price) by a specific date, at the option’s expiration. For this proper, the call buyer will pay an sum of money referred to as a premium, which the decision seller will receive. In contrast to shares, which can live in perpetuity, an alternative will quit to exist after expiration, finishing up both nugatory or with a few cost.
The subsequent additives include the predominant trends of an alternative:
Strike price: The price at which you can buy the underlying stock
Premium: The price of the option, for either buyer or seller
Expiration: When the option expires and is settled
One option is referred to as a settlement, and every settlement represents 100 shares of the underlying stock. Exchanges quote alternatives costs in phrases of the in keeping with-percentage rate, now not the overall charge you must pay to very own the contract. As an example, an choice may be quoted at $0.75 on the exchange. So as to buy one contract it’ll value (one hundred stocks * 1 contract * $0.75), or $75.
How call option works
Call options are “in the money” while the stock price is above the strike rate at expiration. The call proprietor can workout the choice, setting up cash to shop for the stock on the strike charge. Or the owner can clearly sell the option at its honest market price to every other consumer before it expires.
A call owner profits whilst the premium paid is less than the difference between the stock price and the strike price at expiration. For instance, consider a trader bought a call for $0.50 with a strike rate of $20, and the stock is $23 at expiration. The option is really worth $3 (the $23 stock price minus the $20 strike rate) and the trader has made a earnings of $2.50 ($3 minus the cost of $0.50).
If the stock charge is under the strike rate at expiration, then the call is “out of the money” and expires worthless. The call supplier maintains any premium obtained for the option.
