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What is Call Option with Example?

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What is Call Option

Call options are financial contracts. They give the buyer the right, but not the obligation of buying a stock, a bond, or any other matter of asset for that fact. This stock, bond, or commodity is known as the underlying asset, a buyer of the call option profits when this underlying asset goes up in price.

A call option may be contradictory to a put option, and it gives the owner the right to sell the underlying asset at a specified value on or before the expiration.

Now, if you are still confused, let’s understand in depth. 

Understanding Call Option

For instance, let’s assume that the underlying asset is a stock. Call options give the holder the right to buy 100 shares at a specific price, and this specific price is known to be the strike price until a specific date, and this date is called the expiration date.

Let’s take an example, shall we?

A single call option contract can give the holder the right to buy 100 shares of the Google stock at ₹5,000 until the expiration date three months later. There are various expiry dates and strike prices that a trader can choose from. As the value of the Google stock shoots up, or vice versa. The call option buyer can hold the contract until the expiration date. At this point, they can make a delivery of the 100 shares of a stock or sell the options contract at the time.

You pay the fee to buy a call option called the premium. This price is paid for the rights that the call option gives. If at expiration this underlying asset goes below the strike price, then the buyer loses the premium that he paid, and that is the maximum loss. If the underlying asset has a current market price that is above the strike price, at expiration there is a profit. The profit is different in prices and minus the premium. The sum is then multiplied by how many shares the option buyer controls.

Now, we have previously spoken about the call option and put option. Let us look at them in-depth. When it comes to option trading, it becomes essential for you to know both.

Call Option and Put Option

As you know, a call option gives the ability to buy a security at a set price at a later time. A put option, on the other hand, gives you the ability to sell a security at a set price at a later time. Unlike the call option, a put option is a wager, and the price of an underlying asset will go down in the set amount of time. This means you are buying the option to sell shares at a higher price than their Market value.

For this very cause, call and put options are often known to be bullish and bearish, Respectively. While you buy a call or put option, you may not necessarily correspond with a bull market or a bear market. The investor generally has a bullish or bearish attitude about that particular asset. This can often be affected by shareholder meetings, earnings reports, and several other factors that could affect the proof of the company’s assets over a period of time.

Still, wondering how to buy a call options? Don’t worry – we have got you covered in terms of that. Next, we will talk about how to buy a call option, and you can clear your head.

How to Buy a Call Option?

How to actually buy a call option? The answer is right here.

Well, when it comes to call options, they are essentially financial assets that are traded just like stocks and bonds. But, because you are purchasing a financial contract and not the actual stock – the process turns out to be different. 

When you buy a call option, you are essentially buying an agreement that, by the time of the expiration of the contract, you would have the option to buy those shares that it represents. For this reason, what you pay is a premium for the option to exercise the exercise contract. 

A call options contract is usually sold in bulk or bundles of 100 shares. Though the amount of shares for the underlying asset does depend on the particular contract. The underlying asset can be anything, a stock, an ETF, or an index.

The price at which you had agreed to buy the shares is included in the call option, and they are called the strike price, as mentioned earlier. But the price that you pay for the actual call option contract is called a premium. For instance, you could be paying a premium of Rs. 500 for a stock at the strike price of Rs. 6500, thinking that it will go up over a set tenure. The expiration of call options is generally weekly, monthly or quarterly. 

You can buy these options through a brokerage firm or platform. Still, you must be approved for a certain level of options that generally comprise a form that will evaluate your level of expertise on options trading. 

Conclusion

Now that you know about options trading and how to buy a call option – you can go ahead and start anticipating the best of your investments. But on that very note, gain your full expertise before you could dive deep into the investment market.

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