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What is a call option?

What is a call option?

A call option is a type of contract that allows the holder of the contract to purchase an underlying stock at a specific price, even if the market price goes higher.

A call option contract gives the owner of the contract the right to purchase a particular asset, which is typically a stock, at a strike price designated in the contract during a certain period of time. For example, if the stock of company ABC is trading at $100/share, you might purchase the right to buy it at $90/share for a $12/share premium.

This call is already “in the money,” but an investor does not break even with it until the stock goes above $102 ($90 +$12). If, at the call’s expiration, the stock is trading at $110, your call is worth $110 - $90 = $20, which is called it’s intrinsic value, and your profit is $8 ($110 - $102) or a 10.7% gain.

You would accomplish this by using your call option to buy the stock at $90, then turn around and sell the stock at the market price of $110. If, however, the stock is trading at $85 at the expiration, your call is worthless (since you can purchase the same shares on the market at $85), and there’s no intrinsic value in the call option.

Keywords: portfolio management, derivatives, in the money, Out of The Money (OTM), calls, puts, options, intrinsic value,