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Call options are financial instruments that give the buyer the right, but not the obligation, to purchase an asset at a specified price within a certain time frame. They are commonly used for investment strategies and risk management. Understanding how they work can help individuals make informed decisions about managing their money.
What Are Call Options?
A call option is a contract between a buyer and a seller. The buyer pays a premium for the right to buy an underlying asset, such as stocks, at a predetermined price called the strike price. If the asset’s market price exceeds the strike price, the buyer can profit by purchasing at the lower price and selling at the current market value.
How to Use Call Options
Call options can be used for various purposes, including speculation and hedging. Investors might buy call options if they believe the price of an asset will increase. Conversely, sellers of call options earn premiums and hope the asset’s price stays below the strike price, so the options expire worthless.
Key Terms to Know
- Premium: The price paid for the call option.
- Strike Price: The price at which the asset can be bought.
- Expiration Date: The date when the option expires.
- Underlying Asset: The asset that can be purchased through the option.