Call Option

A call option is the right to buy a certain quantity of a given asset or commodity for the specified Strike Price before the Expiration date of the option contract. Purchasers of call Options expect the price of the Underlying security to rise or stay above the Strike Price so they can acquire it for less than the market value and earn a profit from the difference. Call buyers are referred to as being Long of calls. In addition to buying calls, call option writers can sell call Options, this is known as going Short.

Buyers of Call Options are sometimes referred to as being Bullish about the prospects for the security or commodity. Conversely, sellers of call Options are Bearish about its outlook. Note that due to the ability to both buy and sell call Options, it is possible to be either Bullish or Bearish when trading Calls.

The opposite position to call Options is a Put Option where the owner of the option expects the price of the asset or commodity to fall. These have similar characteristics and it is possible to be both Long and Short puts (or Bearish and Bullish) about them also.



See the Profit & Loss diagram of a Long Call at OptionCreator

Example

XYZ is currently trading at $100

Long 1 x At The Money $100 Call Option for 5.0 = $500

Net debit to enter trade = 5

At expiration XYZ is trading at $110

Long 1 x At The Money $100 Call Option is now worth 10.0 = $1000
Net profit = $500 ($1000 - $500)

At expiration XYZ is trading at $90

Long 1 x At The Money $100 Call Option expires worthless = $0
Net loss = (-$500)

At expiration XYZ is still trading at $100

Long 1 x At The Money $100 Call Option expires worthless = $0
Net loss = (-$500)

At expiration XYZ is trading at $105

Long 1 x At The Money $100 Call Option is worth 5 = $500
Break even: $500 to enter, option is worth $500 at Expiration.