Definition of Call Option



A call option is a right to buy certain security at a price when the holder is expecting that the prices may increase. The call option gives the holder a right not obligation to buy a share for example for $50 when the market price is $60. In this case, the holder can gain $10 from buying the share for $50 by exercising the call option and then selling the share in the market for $60.

 


The price that is fixed in a call option is called the strike price that in the above example is $50. The share price may fall or increase but the option will only be exercised when it is beneficial for the holder. If the price falls below $50 then the holder will not exercise the option and buy the share at market value instead of exercising the option.

 

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