Call Option

Discipline: Economics

A call option is the right to buy the shares of a particular stock at a preset price.

Investors purchase call options when they believe that the market price of a particular stock will increase. If the price of the stock in question exceeds the preset price that the call option allows purchase (plus the cost of option), the investors then exercise the option - just so she can sell it with the currently higher market price and make profit.

If the price of the stock in question does not increase as expected, the investor then loses all the money she spent on purchasing the option.

Also see: put option

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