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, ST – X)
where, C is the call option payoff
ST 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, ST – X) = Max (0, 35 – 28) = 7