When you buy a call option, you are paying for the right to sell a share at a certain price, which protects you in case the price suddenly starts to tank. The money you pay for this option is the call premium.
So say you are holding a stock at $15 per share. You buy a call option to sell at $13 a share, with an expiration date 30 days from now. You now have the right, but not the obligation, to sell the stock at $13 if you want to by the expiration date.
If the stock stays above $13, you're not going to exercise the option. You'll just let it expire. But if it turns out the CEO was making up most of the company's clients and the stock falls to $5 a share, you have protection in place. You can exercise your option and sell at $13. Say you paid $2 for that option. That $2 is the call premium.
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Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
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