What's a call option?

Options can be financial contracts that are drawn on an underlying asset. This could be stocks, commodities or currencies.

Call options are a right to purchase without an obligation. You can execute an option contract only when it is profitable.

Call options are a right to purchase without an obligation. If you have a TCS call option, you can buy TCS but not be obligated to. If you bought a TCS 1-month 2700 option call option at Rs.45, it would be an example. If the price of TCS falls below Rs.2850 on settlement day, then the option will be profitable. If the price of TCS is at Rs.2500 on the settlement date, then you will not be interested in purchasing TCS at 2700. You can also buy it on the open market for Rs.2500. This right is granted to you without obligation. The premium will be Rs.45.

A call option will be given a strike price. This is the price that was quoted for the underlier of the contract. It also has an expiration date. The strike price for TCS shares is 2700 and the expiry is 1 month. You must pay a premium to purchase a call option. The premium is the amount that the seller retains if you do not exercise your call option. This will in turn be his profit. The seller must sell the underlier at strike price if the call option holder chooses to exercise his right.

Put options and call options are opposite to each other. Options holders have the right to sell underliers at a strike price and at a future date. Both put options and call options are traded in India. Let's now look at options trading in India.

 

Key Takeaways

- Call options, financial contracts, give the holder the right to purchase an underlier at a strike rate on a future date

When the strike price is lower that the market price at expiry, it is profitable to execute a call option

- When the price of the belowlier goes up in the market, a call option is considered premium.

A premium is the market price for the call option. It is based on two factors: The difference between the strike and spot price of the underlier, and the time before the option expires.

Call options can be bought to speculate and then sold to make income.