Call Options: First Lesson

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EDUCATION ONLY

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An option is the right, but not the obligation to buy (call) or sell (put) a security (stock, ETF or currency) at a certain price (strike price) on or before a certain date (expiration).

One call option gives the buyer the right, but not the obligation, to buy a security at a strike price on or before the expiration date. One call option also allows the buyer to sell the call option. The option premium or the price of the option depends on three factors: time value, stock value and implied volatility.

An investor buys a one $55 strike option for $100 option premium.

(1) The stock price rises to $60 and the investor excercises (*) the option.

100 (60 – 55) – 100 = 400

The investor profits $400.

(*) The investor buys 100 stock shares.

(2) The stock price declines to $45. The option becomes worthless.

The investor loses the option premium of $100.

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