Call Option Definition
Call Option Explained
The call option gives an investor or holder several benefits by obtaining one of these contracts. One of the benefits is that the holder can watch the company and its stock on the market risk free because the holder does not have to exercise the call option. If the stock goes down then the call option holder simply lets the option expire. Once there has been a call option expiration then the call option has become useless to the holder. If the price were to go up above the exercise or strike price then the holder could exercise the call option and make an instant profit in the market.
Call Option Example
Jim has just received an option to buy 100 shares of Wawadoo Inc. at a price of $32 in January. The call option expiration date is set for December 31st. The price of the stock in January is $28. In November, the stock price of Wawadoo has risen to $35. Jim decides that the stock will not drop again and exercises his call option. Upon calling Jim has made a profit of $300 (($35*100) – ($32*100)). It should be noted that this is just one call option, often times people will receive several call options usually as compensation for business or for work done as an employee. If the price never surpassed the price of $32 by December, Jim would have just let his option expire meaning he would lose nothing and gain nothing.