What is a 'Call' option?

By Research Desk
about 6 years ago

Call option gives the buyer the right but not the obligation to buy a given quantity of the underlying asset at a given price on or before a given future date.

 

For e.g.: Buying 1 call option of ONGC 250 28Nov2013 comprising 1,000 equity shares for Rs. 80 per call will give the buyer the right to buy 1,000  ONGC shares on or before 28th November 2013 at Rs. 250 per share, irrespective of the share price (in cash market). Since it is only a right and no obligation to buy, the buyer can let this right lapse, which will be the case when ONGC share price is less than Rs. 250 in cash market. In the above case, loss is limited to Rs. 80 while the gains are unlimited to the buyer.

 

Rs. 80 paid is termed as option premium or the cost of purchasing 1 call option containing the pre-determined quantity of the underlying.

 

Selling a call option gives the seller the obligation to sell a given quantity of the underlying asset at a given price on or before a given future date, when the right is exercised by the buyer. For a seller of call option, profit is limited to the premium earned while loss it unlimited, as the buyer can exercise his call option anytime till the expiry of contract.

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