A call option gives buyers the right to buy a stock or other investment at a specific price within a specific time frame. These options allow buyers to potentially invest a small amount of capital to gain a profit from a price rise or hedge away from potential risks. Likewise, a put option is the opposite of a call option. A put option is the right to sell a stock for a predetermined rate and date. Both options have the potential to make investors money.
- A call option can be defined as a right but not an obligation of a call options buyer to buy a stock at a specific price.
- Whenever the call option buyer decides to exercise their right to buy the stock, the seller is obligated to sell to the buyer.
- The buyer of the option has the right to buy the stock or financial instrument before the option expires which could be a length of 3 or 6 months.
“Before your option expires, the price of the stock rises from $28 to $40. Then you could exercise your right to buy 100 shares of the stock at $30, immediately giving you a $10 per share profit.”