Call option

Definition

A call option is a financial contract that gives the holder the right, but not the obligation, to buy an asset at a specified price within a specific time period. Call options are commonly used in risk management and investment strategies to leverage or hedge positions.

5 Must Know Facts For Your Next Test

1. The buyer of a call option profits if the underlying asset's price increases above the strike price before expiration.
2. The seller (or writer) of a call option has the obligation to sell the underlying asset if the buyer exercises the option.
3. Call options have an expiration date after which they become worthless if not exercised.
4. The premium is the price paid by the buyer to acquire the call option.
5. Call options can be used as a hedging tool to protect against potential losses in other investments.

Review Questions

• What rights does owning a call option confer upon its holder?
• How does an increase in the underlying asset's price affect the value of a call option?
• What happens to a call option after its expiration date?

Related terms

Put Option: A financial contract that gives the holder the right, but not the obligation, to sell an asset at a specified price within a specific time period.

Strike Price: The predetermined price at which an option can be exercised.

Premium: The cost paid by an investor to purchase an option contract.