To figure out what calls are all about, we first have to understand options trading. There are two kinds of options: call options if you want to predict the price of an asset will go up within a period of time, or put options where you predict the price will go down.
With us so far? All options have an underlying "instrument" that could be a stock, bond, commodity (corn, wheat, etc.), or foreign currency. Traders, also called "writers," sell call options on a stock, for example, and set a "strike price" (what price the stock must reach) for a particular time period.
For a call option, another trader buys the option, giving him or her the right (but not the obligation) to buy a specific number of shares at the strike price within that timeframe. If the buyer of the call option does decide to "exercise" (buy) the shares, the seller has to deliver them. When the strike price is less than the market price at the end of the agreed-upon timeframe, the buyer would most likely decide not to exercise the option, and just let them expire.
Let's say Alice owns 12,000 shares of Call Me Happy, Inc. that are valued at $5.00 a share. With all that is going on in the economy, she starts to worry that the price will go down in the relatively near future. So she decides to protect herself and decides to sell a call option to Richard, who thinks the price will continue to go up. Their contract states that Richard can buy Alice's 12,000 shares six months from now at $6.00 per share. If the market price is only $4 at the end of six months, Richard will no longer be interested and they will let the call option expire.
However, if the stock rises to $7 a share, Richard can exercise his option, buy the shares at $6 and pocket the profit.
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Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
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