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A call option, often simply labeled a "call", is a contract, between the buyer and the seller of the call option, to exchange a
security Security is freedom from, or resilience against, potential Potential generally refers to a currently unrealized ability. The term is used in a wide variety of fields, from physics Physics is the natural science that studies matter, its El ...
at a set price. The buyer of the call
option Option or Options may refer to: Computing *Option key, a key on Apple computer keyboards *Option type, a polymorphic data type in programming languages *Command-line option, an optional parameter to a command *OPTIONS, an Hypertext Transfer Prot ...
has the right, but not the obligation, to buy an agreed quantity of a particular
commodity In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
or
financial instrument Financial instruments are monetary contracts A contract is a legally binding document between at least two parties that defines and governs the rights and duties of the parties to an agreement. A contract is legally enforceable because it me ...
(the
underlying In finance, the underlying of a derivative In mathematics Mathematics (from Ancient Greek, Greek: ) includes the study of such topics as quantity (number theory), mathematical structure, structure (algebra), space (geometry), and calculu ...
) from the seller of the option at a certain time (the expiration date) for a certain price (the
strike price In finance, the strike price (or exercise price) of an option (finance), option is a fixed price at which the owner of the option can buy (in the case of a call option, call), or sell (in the case of a put option, put), the underlying Security (fin ...
). The seller (or "writer") is obliged to sell the commodity or financial instrument to the buyer if the buyer so decides. The buyer pays a fee (called a premium) for this right. The term "call" comes from the fact that the owner has the right to "call the stock away" from the seller.


Price of options

Option values vary with the value of the underlying instrument over time. The price of the call contract must act as a proxy response for the valuation of: * the expected intrinsic value of the option, defined as the expected value of the difference between the strike price and the market value, i.e., max −X, 0 * the
risk premium Overview A risk premium is a measure of excess return that is required by an individual to compensate them for being subjected to an increased level of risk. It is used widely in finance and economics with the general definition being the expect ...
to compensate for the unpredictability of the value * the
time value of money The time value of money is the widely accepted conjecture that there is greater benefit to receiving a sum of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are co ...
reflecting the delay to the payout time The call contract price generally will be higher when the contract has more time to expire (except in cases when a significant
dividend A dividend is a distribution of profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit ...

dividend
is present) and when the underlying financial instrument shows more volatility. Determining this value is one of the central functions of
financial mathematics Mathematical finance, also known as quantitative finance and financial mathematics, is a field of applied mathematics, concerned with mathematical modeling of financial markets. See Quantitative analyst. In general, there exist two separate branch ...
. The most common method used is the Black–Scholes formula. Importantly, the Black-Scholes formula provides an estimate of the price of European-style options. Whatever the formula used, the buyer and seller must agree on the initial value (the premium or price of the call contract), otherwise the exchange (buy/sell) of the call will not take place. Adjustment to Call Option: When a call has the strike price above the break even limit, i.e. when the buyer is making profit, there are many avenues to explore. Some of them are as follows: # Sell the call and book profit. # Continue to hold the position, if there is hope of making more money. # Buy a protective "put" of the strike that suits, if there is interest in holding the position but having some protection. # Sell a call of higher strike price and convert the position into "call spread" and thus limit loss if the market reverses. Similarly, if the buyer is making loss on his or her position i.e. the call is
out-of-the-money In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availabl ...
, where the market price is less than or equal to the exercise price. The buyer can make several adjustments to limit the loss or even make some profit.


Options

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Put option In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availabl ...

Put option
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Binary option A binary option is a financial Finance is a term for the management, creation, and study of money and investments. Pamela Drake and Frank Fabozzi (2009)What Is Finance?/ref> Specifically, it deals with the questions of how an individual, comp ...
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Bond option In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available ...
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Credit default optionIn finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available w ...
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Exotic option In finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in t ...
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Foreign exchange option In finance, a foreign exchange option (commonly shortened to just FX option or currency option) is a derivative In mathematics Mathematics (from Ancient Greek, Greek: ) includes the study of such topics as quantity (number theory), mathem ...
*
Interest rate cap and floor An interest rate cap is a type of interest rate derivative In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money ...
* Options on futures *
Stock option In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...
*
Swaption A swaption is an option granting its owner the right but not the obligation to enter into an underlying swap. Although options can be traded on a variety of swaps, the term "swaption" typically refers to options on interest rate swap In finance ...


See also

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Covered call A covered call is a financial market transaction in which the seller of call options owns the corresponding amount of the underlying instrument, such as shares of a stock or other securities. If a trader buys the underlying instrument at the same ti ...

Covered call
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Moneyness In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available ...
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Naked call A naked call occurs when a speculator writes (sells) a call option on a security without ownership of that security. It is one of the riskiest options strategies because it carries unlimited risk as opposed to a naked put, where the maximum loss ...
* Naked put *
Option time valueIn finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available w ...
*
Pre-emption rightA pre-emption right, right of pre-emption, or first option to buy is a contractual right to acquire certain property newly coming into existence before it can be offered to any other person or entity. It comes from the Latin verb ''emo, emere, emi, e ...
*
Put option In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availabl ...

Put option
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Put–call parityIn financial mathematicsMathematical finance, also known as quantitative finance and financial mathematics, is a field of applied mathematics, concerned with mathematical modeling of financial markets. Generally, mathematical finance will derive and ...
*
Right of first refusal Right of first refusal (ROFR or RFR) is a contractual right A concession or concession agreement is a grant of rights, land or property by a government, local authority, corporation, individual or other legal entity. Public services such as ...


References

{{Derivatives market Options (finance) nl:Optie#Call-opties