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What does 'call option' mean?

What does 'call option' mean?

If you own a Call Option, you have the right (not the obligation) to purchase a security at an agreed-upon price from the seller of the option. Buying a call option means you are bullish on the security.

For example, an investor may buy an August 2017 call on stock XYZ for $50/share (strike price). This means that the owner of this call option has the ability to buy XYZ on the expiration date (August) for $50/share.

If the stock is trading higher, say at $75/share by that time, the investor made a good decision! If the stock is trading for less than $50, the investor won’t gain from exercising the option. In this case, the only loss incurred is the cost of the option contract.

The quote for a call option contract will state the expiration month, the strike price at which the buyer can purchase shares regardless of market price, and the premium price to be paid for the contract. All this is quoted in terms of one share, but the contract purchases 100 shares.

Within the expiration month, options typically expire the 3rd Friday of the month at 4PM. The call option is the most common type of option traded.

Keywords: stocks, risk, security, call option,
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