What is Call?
An agreement to buy something at a specific price within a specific period. When making a call option, the buyer has the right to the agreed-upon price but is not obligated to make a purchase.
A call option is a financial contract that governs the transactions between the call buyer and the call writer (seller). The call writer must sell the underlying asset to the call buyer if the buyer decides to move forward with the sale within an agreed-upon period of time. If the call buyer purchases the option within the specified time, then they pay the market price for the call, which is called a premium.
The buying and selling of options can involve a level of volatility, and so requires vigilant tracking of option prices. There are two factors an investor can consider when considering an option, and evaluating option value:
- Shifts in the underlying commodity price.
- Time decay-which measures the rate of value decrease over time
Call options basically give a buyer the right to the price of a certain commodity during trading. If a commodity price falls and is valued lower than the premium paid by the call buyer, the buyer will suffer profit loss, also called a maximum loss.
Profits are calculated based on the sum of an equation containing the value of the underlying asset at the time of option expiration, the current stock price, the premium, and the strike price. The strike price is the fixed price that the option writer can sell or purchase the commodity or stock.
If at the time of option expiration, the price of the underlying asset is above the strike price, then an investor’s profit equals the current stock price, subtracted from the strike price and the premium, then multiplied by the number of shares controlled.
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