Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is "Call" Traders just use the word "call" to signal
that an asset is going to move up, but it represents a financial contract between two
parties, the buyer and the seller. The buyer of the call option has the right, but not
the obligation to buy an agreed quantity of a particular commodity or financial instrument
from the seller of the option at a certain time for a certain price known as the strike
price. The seller is obligated to sell the commodity or financial instrument should the
buyer so decide. The buyer pays a fee called a premium for this right.
The buyer of a call option purchases it in the hope that the price of the underlying
instrument will rise in the future. The seller of the option either expects that it will
not, or is willing to give up some of the upside from a price rise in return for the
premium and retaining the opportunity to make a gain up to the strike price (see below for
examples). Call options are most profitable for the buyer
when the underlying instrument moves up, making the price of the underlying instrument closer
to, or above, and the strike price. The call buyer believes it's likely the price of the
underlying asset will rise by the expiry. The risk is limited to the premium. The profit
for the buyer can be very large, and is limited by how high the underlying instrument's spot
price rises. When the price of the underlying instrument surpasses the strike price, the
option is said to be "in the money".