What is a Call Option (Definition)?

A call option is a contract that gives the holder the right to buy the underlying stock at a specific price. If a person is bullish on the stock (expects the stock to rise) in the near term, that person could buy a call option.

Call option contracts have risk to the buyer or holder. If the option is not profitable, the investor could lose all of the money that was paid for the contract. The money is spent is the premium. The premium is the market price for the option, which will change with the market of the underlying stock. If the market rises after a call option is purchased, the premium will rise and the investor will be profitable. The customer could either trade the option back to the market for a profit or they can exercise the option (purchase the stock at the price on the option and then sell it at some point at the going market price).

Trading Call Options

Most option investors trade them for premium gain or loss vs. exercising the options. If an option is bought for $300 and the market on the stock rises, the investor could sell the call option back to the market for a profit at the increased premium.

Risk

Options carry a unique risk. Unlike owning stock, options expire after a certain period. Standardized options have monthly expirations with a maximum duration of 9 months. A person owning a call option that has an expiration 2 months from purchase month, only has that amount of time to close the position