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Call option definition
A call option is a derivative contract that gives the buyer the right, but not the obligation, to buy an underlying asset at a set strike price before or on expiry. The underlying can be a stock, index, commodity, currency, futures contract, or ETF.
The buyer pays a premium for that right. A call option gains value as the underlying rises above the strike price, though the final profit also depends on the premium paid and the time left to expiry.
A call option caps the buyer's loss at the premium paid, while the potential gain grows as the underlying keeps rising above the strike. Traders use call options to speculate on rising prices, hedge an existing position, or take leveraged upside exposure for a known, limited cost.
Call option Example
You buy a call option on a stock with a USD 50 strike price and pay a USD 2 premium. The stock later rises to USD 60 before expiry.
The option has value because you can buy at USD 50 while the market price is USD 60:
60 - 50 = USD 10 a share, less the USD 2 premium, for USD 8 a share
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