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A call investment option is a financial contract
involving two parties, the buyer and the seller of this type of investment
option. Often it is simply labeled a "call". The buyer of the option
has the right but not the obligation to buy an settled quantity of a particular
commodity or financial instrument from the seller of the option at a certain
time for a certain price. The seller is obligated to sell the commodity or
financial instrument if the buyer should decide to buy. For getting this right
the buyer pays a premium.
As the buyer of a call investment option wants the price
of the underlying instrument to rise in the future; the seller either expects
that it will not, or is willing to give up some of the upside profit from a
price rise in return for the premium plus retaining the opportunity to make a
gain up to the strike price.
Call investment options are most profitable for the buyer
when the underlying instrument is going up, making the price of the underlying
instrument nearer to the strike price. When the prices of the underlying
instrument surpass the strike price, the option is said to be in the money.
The initial transaction in this situation -
buying/selling a call option - is not the supplying of a physical or financial
asset - the underlying instrument. Instead it is the granting of the right to
buy the underlying asset, in exchange for the investment option price or
premium.
Precise specifications may differ depending on option
style. A European call investment option allows the holder to exercise, to buy,
the option only on the delivery date. An American call option allows exercise
at any time during the life of the option.
Call investment options can be purchased on many
financial instruments other than stock in a corporation. Investment Options can
be purchased on interest rates as well as on physical assets such as gold or
crude oil. A call option should not be confused with a stock option. A stock
option is the option to buy stock in a particular company. And it is a right
issued by a corporation to a particular person, normally an employee, to
purchase treasury stock. When a stock option is exercised, new shares are
issued. When a call option is exercised, if it involves shares, the shares are
merely being transferred from one owner to another. Nor is stock investment
options traded on the open market
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