What is Call Option

An option contract is called call option if the seller (writer) gives the buyer of the option the right to purchase from him the underlying asset at a predetermined price at sometime in future. The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument from the seller of the option at a certain time for a certain price .The seller (or “writer”) is obligated to sell the commodity or financial instrument should the buyer so decide. The buyer of the call option has to pay premium.

The loss of buyer in call option is limited to the extent of premium paid by him and profit is unlimited while the loss of writer is unlimited in call option and profit is limited to the amount of premium he has received from the buyer of the option. The buyer of call option believes that price of underlying instrument will increase and he will make profit while seller of the option believes that price of underlying instrument will decline and call option will expire he will take the premium and hence make the profit.

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