trading

call option

An options contract giving the buyer the right to buy a security at a specified strike price before the expiration date. Buyers profit when the stock rises above the strike price.

Example

“She bought a call option with a $50 strike price; when the stock rose to $65, her option was worth $15.”

Memory Tip

CALL option = you CALL (demand) the right to BUY. Profit when prices rise.

Why It Matters

Call options allow investors to control a large amount of stock with a small upfront investment, making them useful for leveraging gains or hedging portfolios. Understanding call options helps you evaluate risk and potential returns when considering options trading as part of your investment strategy.

Common Misconception

Many people believe that buying a call option means you must exercise it and buy the stock. In reality, you can sell the call option contract itself before expiration to realize profits without ever owning the underlying stock.

In Practice

Suppose a stock trades at 50 dollars and you buy a call option with a 55 dollar strike price expiring in one month for 2 dollars. If the stock rises to 65 dollars before expiration, your option is worth at least 10 dollars, giving you a 400 percent return on your 2 dollar investment, while owning the stock outright would have only returned 30 percent.

Etymology

CALL = the buyer CALLS the shares to them by exercising the option to buy.

Common Misspellings

call-optioncall optincall optoin

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