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Call Option

A call option is a financial contract that allows the owner to buy a specific asset at a predetermined price before a set expiration date. The key features include the right to buy, strike price, expiration date, and option premium, with limited risk to the premium paid. Call options are used for speculation, leverage, and risk management in finance.

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Chandra Prakash 11 A 45
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48 views2 pages

Call Option

A call option is a financial contract that allows the owner to buy a specific asset at a predetermined price before a set expiration date. The key features include the right to buy, strike price, expiration date, and option premium, with limited risk to the premium paid. Call options are used for speculation, leverage, and risk management in finance.

Uploaded by

Chandra Prakash 11 A 45
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Call option

A call option is a financial contract that gives the owner the right, but not the obligation, to buy
a specific asset—usually a stock—at a predetermined price (called the strike price or exercise
price) on or before a specific date (called the expiration date or expiry).

Key Features of Call Options:


Right to Buy: The holder can choose to buy the underlying asset if it is favorable.
Strike Price (E): The agreed price at which the asset can be purchased.
Expiration Date (T): The date at which the option expires and can no longer be exercised.
Underlying Asset: The asset on which the option is based, such as a stock (e.g., IBM
stock).
Option Premium: The price paid to purchase the call option itself.

Example:
Suppose you buy a call option on IBM stock with:
Strike price

- Expiration in 1 month
- Current stock price

If the stock price at expiration rises above $30, you can exercise the option to buy the stock
at $30 and potentially sell it at the higher market price, making a profit of minus the
premium you paid for the option. If the stock price stays below $30, you can let the option
expire worthless with no further obligation, losing only the premium paid.

Payoff:
The payoff of a call option at expiration is:

where is the stock price at expiration. If , the option is worthless, and the holder
does not exercise.
Why Buy a Call Option?
Speculation: To profit from an expected rise in the stock price.
Leverage: Control stock at a fraction of the price.
Limited Risk: Maximum loss is the premium paid.
Flexibility: No obligation to buy if conditions are unfavorable.

Pricing:
The value of a call option before expiration depends on the current stock price, strike price,
time to expiration, volatility, risk-free interest rate, and dividend payments.
The famous Black-Scholes model is widely used for calculating theoretical call option
prices.

Summary:
Call options give a right to buy an asset at a fixed price within a time frame.
They are valuable when the underlying asset's price rises above the strike price.
The risk is limited to the premium paid for the option.
Call options are essential tools in hedging, speculation, and risk management in quantitative
finance.
This explanation summarizes the core concepts of a call option found in the provided material [1]
[2] .

If you want, I can also explain put options, option pricing models like Black-Scholes, or how call
options are used in trading strategies. Just let me know!
⁂

1. quant_finance.pptx
2. quantitative_finance.pptx

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