Call Option

Trading

Quick Definition

A Call Option is a financial contract that gives the buyer the right, but not the obligation, to buy an asset at a fixed price (strike price) on or before a specific date.

Detailed Explanation

A Call Option is used when an investor expects the price of an asset to rise. It allows the buyer to purchase the asset at a predetermined price, even if the market price increases.

Call options are traded on exchanges like the National Stock Exchange and Bombay Stock Exchange, regulated by the Securities and Exchange Board of India.

Key Features of Call Option

  • Right to buy an asset
  • Profit when price rises
  • Loss limited to premium paid
  • Defined strike price and expiry date

Important Terms

  • Strike Price: Price at which asset can be bought
  • Premium: Cost of the option
  • Expiry Date: Last date to exercise

Uses of Call Option

  • Speculation: Profit from rising market
  • Hedging: Protect against price increase (e.g., raw materials)

Profit Scenario

  • If market price > strike price → Profit
  • If market price < strike price → Loss limited to premium

Example

"An investor buys a call option with a strike price of ₹100. If the stock rises to ₹120, they can buy at ₹100 and profit."

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