A call option is a particular type of option trade. While you’re reading about options trading, the first two terms you learn tend to be call and put. If you expect that underlying asset prices are likely to increase, you are going to buy a call option. If you expect that underlying asset prices are likely to drop, you are going to purchase a put option. Put and call are like the yin and yang of options investing.


A lot of options traders begin trading options by buying call options. A call option gives you the right, but not the obligation, to purchase or sell an underlying futures contract or stock later on for a given price. When you have the right to purchase, you could “go long”. However when you have an obligation to sell, you would “go short”.


The option seller must give up control of the stock or futures contract when a call option is exercised. The seller gets control of the underlying asset back if the call option is allowed to expire. So you can see that a call option is an actual contract between a buyer and seller and there are specific terms in the contract.


Two of the key words in the definition of a call option are “right” and “obligation”. The call option offers you a right to exercise the option, but you are under no obligation to take action. Should you choose to exercise your right, the seller of the option is required to sell you the underlying asset.


Goal of Buying a Call Option


The objective of an investor purchasing a call option is to make money on rising asset market prices. The buyer anticipates the price of the asset will climb in the future. The call option allows the buyer to buy the asset below market price. The buyer can simply let the option expire if the market price of the asset does not exceed the strike price. In such case, the buyer loses only the premium and the transactions costs.


That is another reason why beginning investors choose call options at first. The upside profit potential is practically limitless. The profit of the buyer is still determined by the strike price and the timing of the option.


It is normal that option seller wants that the option stays out of the money. In that case the seller gets to keep the underlying asset and also the premium and fees paid by the seller.


Call options are available for stocks, bonds, agricultural commodities, precious metals, interest rates and many others. Once the call option is in place, the seller cannot sell the underlying asset listed in the option terms to anyone else.


Watching the Market


Beginner investors can observe the market for a period of time and witness how the big investors perform in order to learn the way to complete profitable call option transactions. You could probably assume the investors expect the price to rise in the near future if you find large volumes of call options during the day for a particular asset. The charts indicate expiration dates allowing you to even see how soon the investors anticipate the prices to surge.


Call options typically play a role in options strategies. As an example, call options are used in long and short straddles. A straddle is a trading strategy that is a spread. For instance, a long straddle balances a call option and a put option in a way that minimizes risk of loss while maximizing speculation.