Call Option
Candlefocus EditorThe buyer of a call option pays a premium for the right to buy the underlying security at a predetermined level – the strike price – within a specified time period. The seller of a call option receives the premium up front. This is the maximum amount that the seller may receive regardless of the call option’s performance, and the maximum amount the buyer can lose on the option.
In essence, call options are particularly attractive because they allow investors to control an underlying asset at a fraction of the cost of actually owning it. This can be desirable in situations where the buyer is uncertain of the asset’s future or expects its price to increase over time. It can also be used as protection against the risk of losses that may occur in the event of a rapid decline in the price of a selected asset.
Call option contracts may be sold for speculation (where the buyer expects the asset’s price to increase) or for income purposes (where the seller expects the asset’s price to remain flat or decline). Call options can also be combined with other strategies to implement spread or combination strategies which involve the buying and selling of multiple option contracts for the same underlying security.
It is important to note that call options are subject to the same risks associated with other investment instruments and those risks should be taken into consideration before entering into a contract. Additionally, call options may not be suitable for all investors due to the risks associated with them, including time decay, market and liquidity risk.