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Call Options: A Deeper Dive

Call Options: A Deeper Dive

Call options, in particular, gives the investor the option to purchase a security, such as a specific stock, at a specific price (referred to as the strike price) up until a specified expiry date. As an example, 1 ABC 110 call option gives the owner the right to buy 100 ABC Inc. shares for $110 each, regardless of their market price, until the option's expiration date.

Call buyers generally expect the underlying stock to rise significantly. Call sellers believe the price will stay the same or fall.

While the buyer of the call option has no obligation to exercise their contract, the seller is obligated to sell the underlying security at the strike price, if exercised.

A call option will possess value at expiry if the price of the underlying security is above the strike price of the contract. If, at expiry an option is in the money, the option will automatically be exercised at that time, unless the broker is advised not to do so.

Profits and losses on call option positions involve two components: the option premium, and the intrinsic value at expiry (if held to expiry). To determine the net profit of an options trade, option buyers can subtract the cost of the option premium from the intrinsic value at expiry.

There are two types of options exercise: American and European. American-style options can be exercised at any time before expiry, while European-style options can be exercised only at expiry. Investors usually don't have a choice of buying either the American or the European option.

Call options can be bought and sold on a wide array of securities, though equity/stock options are the most widely known by investors. Other types include ETFs, Bonds, Futures, Indexes, Currencies, or Swaps. Their market value is determined by buyers and sellers, just like with stocks or other securities.

Call options are the opposite of put options. While calls give their owners the right to buy something at a specific strike price, puts give their owners the right to sell something at a specific strike price.