can anyone make me understand "call option" with an example?

Question

call option related to derivatives in stock markets

Answer 1

An option gives the buyer the option, but not the right to buy the underlying security (usually a stock) at the strike price at or before (for American style) the expiration date. Usually 1 option will give the buyer the right to buy 100 shares of the underlying security.

For example:
1 IBM Dec 07 Call at 110 strike price (IBMLB.X) is priced at 0.30
To buy one option will cost (0.30 x 100) = $30 plus commissions.

If IBM rises above $110 (let's say $112) before the expiration date (12/21), you can exercise or sell the option.

If you exercise:
You will have 100 IBM shares at $112, at a cost of $110, minus the cost of the option, you have:
(112 - 110) x 100 - 30 = $170

If you sell the option:
If the price of the option rises to $2.10 (because the stock price rose), you have:
(2.10 - 0.30) * 100 - 30 = $150

These are just made up numbers and exercising is not always better than selling the option. Of course, the stock could always go down, and you would have corresponding losses.

You can learn more and see examples here:
http://www.optionsclearing.com/learning_center/opt_ed/get_started.jsp

Answer 2

Okay. A call option is an actual contract you, the investor, pays a premium for that OBLIGATES the broker to allow you to buy a stock (or derivative, as mentioned in your question) at the contracted price.
A derivative is a security whose price is dependant upon the underlying asset. A call contract IS a derivative, as you do not own the underlying asset, but the value of your call contract is DEPENDANT on the underlying stock you are buying the contract for.
An Example:
You see XYZ stock is doing well, but you are unsure how they will fare in the coming quarter. They posted mediocre earnings, and you are expecting a change in the coming quarter becuase the recent conference call by the CEO and COO mentioned they were pursuing new contracts that should materialize in the coming quarter.
Right now, XYZ stock is relatively cheap compared to what you expect it to do if these contracts the Big Wigs were talking about come to fruition. Lets say that the XYZ is currently trading at $20/share. So, you buy a three month call option on XYZ for $2/share with a strike price of $22. So lets say you wanted contracts that would guarantee you to 1000 shares, so you paid $2/share/contract...each contract is for 100 shares. You paid $2000 for these 10 contracts. To save money though, you bought the contracts "out-the-money," meaning the current market price is $20/share and your contracts are $22/share. If you exercised the contracts you would lose $2 per share...but this makes these contracts cheap!!! Which is why you did this, you are a saavy investor.
So, three months go by and you were dead on the money!!
As the news reports kept coming out, the company's stock price kept creeping up. Finally earning season is upon us and the company reports a positive earnings surprise (this means the Market analysts assessments were less that what actual were the earnings) and the stocks price jumps to $40 per share. Your eyes practically pop out of your skull.
So you exercise your option, which means you 'call' in your contract and fork over $22,000 to buy these shares at 22 instead of 40. And then, you sell the shares on the open market for 40, netting a profit of $16,000 (40,000 - 22,000 - 2,000).
Now, lets say you were wrong, and you bought the contracts at $22/share but the stock drops like a rock to $16/share. You simply let the contract expire and are out only $2,000 instead of if you put all your money in the stock when it was $20/share, getting 10,000, and then watching the company drop to 16, and being down a depressing $4000.

Hope this helps. Options are real important for international investors as well. Lets say you sell widgets internationally, and you have a contract worth 10 million dollars for Japan, as they are a growing widget market. Well, 10 million dollars now may not be the same when you actually ship your widgets and get paid in yen. So, to protect yourself from a possible loss, you buy Put Option on the USD/JPY in case the Yen drops...which means you have a contract to exercise the right to sell X amount of JPY for USD at a rate that precludes you from losing your 10 million.


I hope this helps.

Answer 3

A call option is a security that gives an owner the right to buy shares of an underlying security at a specific price for a certain fixed period of time.

The price of a call option is dependent upon a number of factors, including volatility and dividends of the underlying stock, interest rates, the strike price, and the expiration date. For example, an investor might buy a call option for IBM expiring in June with a strike price of $100. In other words, the investor now has the option of buying IBM for $100 anytime before the third Friday of June, the expiration date. If an investor thought a security was undervalued, she may buy a call option in anticipation of a rise in the market price.

Answer 4

I think most of us have know a person like that or have a friend who constantly calls us. I had a friend in high school who did nothing all day and always wanted to talk about her boyfriend. I had a part - time job and I had no time for nonsense. So one time when she called me I clocked out from work and told her that I`m busy and that I will talk to her whenever I have time. I will not push aside my plans just so she can complain and bit*h. And she had this annoying habbit of calling me around 11:00 P.M when I was sleeping!!! Sure she was my friend but I had a life and my own problems. Just talk to her and tell her that you`re busy. If she`s a good friend she will understand.

Answer 5

Dark Contrast has a good example, HOWEVER, in the first sentence subsitute OBLIGATION for "right".

Holding the Call contract you do have the right to buy 100 shares at the strike price but are not OBLIGATED to.

See my answer on your other Call Option question for another example.

Answer 6

I agree with what the answer locklain gave, but I do not know if it gives you enough information to answer your question.

If you go to

http://www.cboe.com/LearnCenter/Tutorials.aspx

and take the "options overview" tutorial it will explain it more completely.

Once you understand what one is I hope the example at

http://www.cboe.com/Strategies/EquityOptions/BuyingCalls/part2.aspx

will make sense.