As the name ‘option’ suggests, it is a contract that offers buyers the right to buy or sell an underlying asset at a predetermined price known as the strike price.
The buyer is the party who can choose to exercise this right any time before or on the expiration date of the option.
The seller, on the other hand, has the obligation to fulfil the contract if the buyer chooses to exercise the right.
But of course, to be given the right to do that, the buyer has to pay a premium to the seller to compensate the seller for taking up the obligation.
Example: The buyer of the call option has the right to exercise the call to buy 100 shares of Apple stock at $150 per share any time on, or before the expiration date of 15 Oct 2021, regardless of the current market price of Apple. In exchange for this right to exercise the call option, he has to pay a premium of $450.
If you want to learn more in detail about what call options are, watch the full video below! In the video, we use an analogy to explain the mechanics of call options for beginners to understand call options on a clearer note.
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