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A call option, often simply labeled a "call", is a financial contract between two parties, the buyer and
the seller of this type of option. 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 (the underlying) from the seller of the option at
a certain time (the expiration date) for a certain price (the strike price). The seller (or "writer") 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 wants the price of the underlying instrument to rise in the future; the seller either
expects that it will not, or is willing to give up some of the upside (profit) from a price rise in return for the
premium (paid immediately) and retaining the opportunity to make a gain up to the strike price (see below for
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, the strike price. The call buyer believes it's likely the price of the
underlying asset will rise by the exercise date. The risk is limited to the premium. The profit for the buyer can
be very large, and is limited by how high underlying's spot rises. When the price of the underlying instrument
surpasses the strike price, the option is said to be "in the money".
The call writer does not believe the price of the underlying security is likely to rise. The writer sells the
call to collect the premium and does not receive any gain if the stock rises above the strike price.
The initial transaction in this context (buying/selling a call option) is not the supplying of a physical or
financial asset (the underlying instrument). Rather it is the granting of the right to buy the underlying asset, in
exchange for a fee — the option price or premium.
Exact specifications may differ depending on option style. A European call option allows the holder to exercise
the option (i.e., to buy) only on the option expiration date. An American call option allows exercise at any time
during the life of the option.
Call options can be purchased on many financial instruments other than stock in a corporation. Options can be
purchased on futures on interest rates, for example (see interest rate cap), and on commodities like gold or crude
oil. A tradeable call option should not be confused with either Incentive stock options or with a warrant. An
incentive stock option, the option to buy stock in a particular company, is a right granted by a corporation to a
particular person (typically executives) to purchase treasury stock. When an incentive stock option is exercised,
new shares are issued. Incentive stock options are not traded on the open market. In contrast, when a call option
is exercised, the underlying asset is transferred from one owner to another.