A call in the options markets is a type of contract. Ultimately, the price of an options call is determined by an underlying security, such as a stock or bond. A call contract gives an investor the right to buy the underlying security in an options contract at a preset price, known as a strike price, prior to the expiration of the contract. An options call is the alternative to an options put, which is a contract to sell a security for a preset price prior to the expiration of an options contract.
An investor in a call option is not obligated to purchase the contract, but rather is given the option to do so. Call options are typically purchased in lots of 100 shares. An investor decides whether or not to exercise an option and purchase a security at the call price if it is below the market value of a security.
For instance, if an options contract's call price is valued at $10 US Dollars (USD), and the stock is trading at $12 USD in the stock market, it would make sense to exercise the call option. This is because at the call price, an investor is obtaining a position in a security for $2 USD less than it would cost to purchase the same security in the stock market.
By purchasing a call option, an investor is betting that the market value of a security will rise above the call price. This represents bullish sentiment, which means the owner of the contract is going long on this particular security. The opposite would be to short a security, or bet on its decline.
An investor is required to pay a premium for an options call contract to a seller, which typically translates into a fraction of the cost for the shares. He is willing to do this because he believes that the price of the security will rise in value before the options contract expires. The seller of an options call is entitled to the premium whether or not the buyer decides to exercise the right to purchase the securities.
There are various ways to profit from an options call price. A covered call strategy is a method that is designed to bolster an options' investors returns. By covering a call, an investor sells call contracts on a security that he also owns outright in the stock market as a long-term investment. This investor has a position in a security both in the stock market and the options market. Profits generated from selling an options call contract create income in the short term. As a result, an investor is able to hold onto a stock market investment while still profiting from revenue derived from selling options contracts.
