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Call Option
Definition:
A call option is a financial contract in which the holder of a call option has the right (but not the obligation) to buy a specified quantity of a security at a specific price (strike price) within a fixed period of time (until its expiration).
For the writer of a call option, it represents an obligation to sell the underlying security at the strike price if the option is exercised.
Buying Calls vs Buying Stock
It is cheaper to buy the call option than purchasing the underlying stock outright. This enable the investor to gain leverage.
However, call options have a limited lifespan. If the underlying stock price does not move above the strike price before the option expiration date, the call option will expire worthless.
Trading Call Options
Buying Calls
Call buying, or long call, is the simplest strategy in options trading. Novice traders often start off trading options by buying calls, not only because of its simplicity but also due to the large ROI generated from successful trades.
Selling Calls
Selling calls, or short call, involves more risk but can be very profitable if executed properly. One can sell covered calls or naked (uncovered) calls.
Call Spreads
A call spread is an options trading strategy in which a call option is bought while another call option is sold on the same underlying security simultaneously. Examples of call spreads include the bull call spread and the bear call spread.