What Is A Call?

Betting On The Future, Carefully

When referring to a call in the context of stock market trading, it is known as a call option.  A stock call option is a contract, a written agreement between a seller and a buyer for a given stock, commodity, currency, etc.  The contract will specify that the buyer of the call option will reserve the right to make a future purchase of a stock from the seller.  The stock call will have a set expiration date.  After this date the call option is no longer available to buy at the stock call option contract price.  Essentially the buyer is betting that the stock will increase in value over time, significantly enough to make the stock option and fee to the seller worth the while.  The fee or premium goes to the seller for the privilege to buy the stock not at the potential price in the future, but at a set call option price established in the present between the two parties, buyer and seller.  This premium will be based per stock or commodity, and is the incentive for the seller to make the stock call option contract.  The seller, unlike the buyer, is betting on the call option stock or commodity not increasing in value over the contract period.  The gain for them is that in the stock call option contract the premium is specified to be paid whether or not the stock is bought by the expiration date.  It is important to note that the buyer, or the stock call option holder, is not obligated to buy the stock or commodity by the expiration date, but will always have to pay the premium to the seller.  In Europe the purchase of the stock or commodity on a call option must be exercised on the date of the contract expiration.  In the United States this purchase can be made at any point after the stock call option contract is purchased but before the expiration date.

Examples Of How Calls Can And Cannot Work

To clarify the point of a stock call option, look at this example to see where there is a potential for profit for both parties.  It will also show essentially how call options work as a sort of insurance policy against substantial losses.

Buyer is offered 1,000 shares of stock in ABC for $20 per stock with a premium of $0.25/per share.  Buyer executes sale after one year when stock is now trading for $25 per share.  With the call option the net gain for the buyer is:

$4,750 is the net profit for the stock call option contract to the buyer.

$5,000 is what is made over the call option price versus the buying price.

$250 is the amount paid to the seller as the stock call option premium.

$25,000 is the value of the stock once purchased and now owned by the buyer.

Related posts:

1. What Is A Covered Call?
2. What Is An Option?
3. What Are Commodities?
4. What Is An Ask?
5. What Is A Bid?