What is a Call Option?

A call option gives its holder the right, but not the obligation, to purchase an asset at the specified strike price, within a specified window of time. For our purposes, the underlying asset is a stock. The call seller, however, is obligated to sell the stock at the strike price if the buyer chooses to exercise the option at any point before its expiration.

call option
call option

The strike price is the key element in any option. If you hold a call for stock XYZ with a strike price of $50, that means you have the right to purchase 100 shares of XYZ for $50 per share at any point between the time you purchased the call and its expiration date. Any time stock XYZ is above $50, your call is in-the-money, which means it has an actual value to the option holder. If stock XYZ is below $50, the call is out-of-the-money, as it would be imprudent to exercise a $50 call when you can buy the stock for less.

Even if a call is out-of-the-money, it will still have a bid and ask price higher than zero based on the chance it may become valuable before the expiration date.

When a call option is exercised, the seller is obligated to sell 100 shares of the underlying stock at the strike price. If the seller does not have 100 shares to sell, he must purchase them at the current trading price in order to honor the contract.

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