What is a call option?
A call option gives you the right to buy a stock at a certain price. Let’s say the price of ABC stock is $50. But you think the price is going to $60. So you buy a call option that has a strike price of $55. When you buy the option, it is “out of the money.” That’s because your option can only be exercised if the price goes to $55. Right now, the price is still at $50. But let’s say the price goes to $54. At this point, your option is very close to being “in the money.” Because of this, the value of your option will have increased. You can resell the option for a profit, or wait to hit your strike price. If your option does hit the strike price, you are now “in the money.” Let’s say the price goes up to $58. You now have the right to BUY the stock at $55. You can then turn around immediately and sell that stock at the market for a profit of $3 on every share.
