A call option is an investment contract that gives the buyer the option to buy 100 shares of the security underlying the option at some date in the future. To exercise a call option, the buyer buys the 100 shares of the underlying security. The buyer may exercise a call option only once the price of the underlying security surpasses the strike price, which is predetermined at the start of the contract. Profit may be gained by then selling the underlying security at the higher price.
Option trading is a complicated process at times, requiring investors to know which direction stocks are going to move and at what point those moves will be made. Still, the benefits of options trading are often worth the complications, because profits gained from successful options trades can far outstrip typical stock trades. Call options are bought when an investor believes a stock will rise, and an investor may wish to exercise a call option if he believes in the continued rise of the stock.
To exercise a call option, an investor must first be aware of the premium paid for the options contract, the strike price, and the expiration date. The premium is the quoted price of the contract, which is multiplied by 100, as exercising the option requires buying 100 shares of the underlying security. A call option may be exercised only once the stock price goes above the strike price, which is determined at the outset of the contract. Once the contract reaches its expiration date, the call option can no longer be exercised.
For example, an investor pays $300 US Dollars (USD) for a $3 USD options contract to buy 100 shares of a security, which is currently valued at $40 USD per share and has a strike price of $50 USD per share, with an expiration date set three weeks in the future. The investor may exercise the option to buy the shares at any point before the expiration date once the security's price goes past $50 USD per share, although the actual break-even point would be $53 USD per share, which is the price of the contract added to the strike price. Once that occurs, the investor may wish to sell the shares and realize the profit of the price rise, or she may wish to hold onto them in hopes the shares will continue to rise.
In actuality, it is relatively rare for an investor to exercise a call option. As the price of the options contract will rise in accordance with the rise of the underlying security, an investor can close out his contract by selling the options contract to another buyer. If the stock never reaches the strike price, the option is worthless and the investor will receive nothing in return for her initial investment.
