A call option is a financial derivative that gives the buyer the right (but not the obligation) to buy an asset from the option seller in the future at a predetermined price.
The owner or buyer of a call option benefits from the option if the underlying asset rises, that is, if when the call option expiration date arrives, the asset (a share for example) has a price higher than the agreed price. In that case, the buyer of the option will exercise his right and buy the asset at the agreed price and sell it at the current market price, earning the difference.
If the price turns out to be less than the agreed price, known as the strike or strike price, the buyer will not exercise his right and will simply have lost the premium he paid to acquire the option. Therefore, your benefit may be unlimited, but your loss is limited to the premium you paid.
Buyer’s profit can be more easily seen on a graph. Where PE is the price the exercise, Bº is the profit of the option and Pª, the loss. The price of the underlying asset is larger as we move to the right.
For the seller of the call option, just the opposite occurs. Your maximum profit will be the value for which you sold the option, which you will have as long as the asset does not go up in price. And as the price of the asset goes up, its profit is diluted, until it reaches a point where it enters losses and from there its losses are unlimited.
The value of the call option on the expiration date will always be greater than or equal to zero. Its value is the maximum of zero or a variable. This variable is the present value of the asset minus the exercise price. Being S the price of the asset at the end of the established period.
Call = max (0, S – PE)
The opposite option is a put option.
To see in more detail what financial options are you can see Financial options – What are they? and Financial options – Types and example.
Result structure of a call option
The buyer acquires the right, but not the obligation, to buy an underlying asset at a specified price, in a period of time not exceeding a stipulated date. The seller of the call option assumes the obligation to sell the underlying asset, if the option is exercised.
When an investor buys a call option, he has a bullish expectation; You expect the value of the underlying asset to rise in the market above a price equivalent to the exercise price increased from the value of the premium you have paid, in a period of time not exceeding the expiration date of the option contract.