What are Call Options?

What are Call Options?

Call options gives the option owner the right, but not the obligation, to purchase the underlying assets against the premium paid at a given strike rate for the given maturity. In the case of a call option, the call option only buys the security if the current market price is higher than the strike price.

Example of Call Options:

The payoff of a call option is given as the following:

C = Max (0, S_T – X)

where, C is the call option payoff
S_T  is the current stock price
X is the strike price

Let’s take an example of a stock currently trading at USD 25. Let’s assume a buyer purchase a call option with a month’s maturity and a strike price of USD 28. If the price reaches USD 35 in a month, the payoff would be:

C = Max (0, S_T – X) = Max (0, 35 – 28) = 7