Definition of Call Option
What is a Call Option
A call option is the contractual right, but not the obligation, to buy a security, commodity or other asset at a specific price within a specific time frame. The predetermined buying price is called the strike price.
The right can be exercised either on or before the expiration date for American options but European options can only be exercised at expiration. Call options can be used as a hedge or for speculation. They can also be combined with other option contracts to create trading strategies, such as option spreads.
The price of a call option is influenced by the changes in the price of the underlying asset, the option strike price, time decay, interest rates and volatility. Call options increase in value when the underlying asset increases in price, the volatility of the underlying asset decreases or as interest rates increase.
Long Call vs Short Call
A long call is an open call option on a security or any other underlying asset that has been bought. A long call is a strategy that can be used when there is bullish sentiment on the underlying and the price is expected to increase.
A short call is an open call option position on a security or any other underlying asset that has been sold. A short call is a strategy that can be used when there is bearish sentiment on the underlying and the price is expected to decline or stay at the current price.
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