What is a call option?
A call option is a type of financial instrument known as a derivative. It is basically an agreement between two parties to exchange ownership of a stock at an agreed upon price within a certain time period. The exchange of the stock is optional and the owner of the call option decides whether it takes place. The agreed upon price of the exchange is called the strike price. The date on which the agreement expires is the expiry date of the call option. The amount of money required to purchase this call option is called the premium. If the exchange takes place, then one is said to have exercised the call option. Call option premiums are always quoted per stock, but sold in lots of 100 shares minimum. Call options are always an agreement about being able to purchase the stock at the agreed upon price. Call options come in both European style and American style. European style call options are sold on European exchanges, while American style call options are sold in North American exchanges
In options trading, call options are simply known as “calls”. The buyer of a call option has the right, but not the obligation, to buy an agreed quantity of the underlying stock from the seller of that call option before the call option contract expires at a certain time (the expiration date) for a predetermined, agreed price (the strike price). In layman terms, when you buy a call option, you have the right to buy the stock at the agreed price anytime you want to no matter what price that stock is trading at prior to the expiry of that call option. For example, if you buy a Call option on a stock with a strike price of $10 and an expiration date 2 months later, you have the right to exercise the right to buy that stock at $10 no matter what price the stock may be before the 2 months period is up. This allows you to make a leveraged profit when the stock goes up.
