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All trading involves risk. Losses can exceed deposits.
Call definition
All trading involves risk. Losses can exceed deposits.
What is a call?
A call is a type of option that gives the purchaser the right, but not the obligation, to buy a certain market at a certain price (called the strike price) before its expiry date.
Call options allow traders to profit if an asset’s price increases beyond a certain point within a specified time. They are the opposite of put options, which allow traders to profit if an asset’s price decreases beyond a certain point within a defined period of time.
How a call option works
A call option works by guaranteeing a price at which you can purchase the underlying asset until your set expiry date – but unlike futures, not requiring you to buy the asset if the trade never earns a profit. Instead, if the asset’s price never exceeds the strike price of your option, you can leave it to expire and lose only what you paid for the option in the first place. This is known as the premium.
If the asset’s price does exceed the strike price, you can fill your option by buying the asset for less than its current market value.
Call example
You buy a call option on Apple with a strike price of $180 and an expiry at the end of the week. If Apple’s stock exceeds $130 in value then the option is in profit (known as in the money). You can then execute the option at any time before the end of the week and buy the stock for $130 – lower than the current market price.
If Apple never reaches $130 then no profit can be made, but the only loss is the initial premium paid to take out the call option.
New to options?
Visit our options section to find out more.
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