what is a call option 
call options are financial contracts that give the buyer the right but not the obligation to buy a stock bond commodity or other asset or instrument at a specified price within a specific period a call seller must sell the asset if the buyer exercises the call a call buyer profits when the underlying asset increases in price share prices can increase for several reasons including positive company news and during acquisitions the seller profits from the premium if the price drops below the strike price at expiration because the buyer will typically not execute the option a call option may be contrasted with a put option which gives the holder the right to sell force the buyer to purchase the asset at a specified price on or before expiration understanding call optionsoptions are essentially a bet between two investors one believes the price of an asset will go down and one thinks it will rise the asset can be a stock bond commodity or other investing instrument the contract is an option a choice to buy the asset at a specific price by a certain date the date is called the expiration date known as expiry and the asset is called the underlying asset it s also called the underlying the price is called the strike price the strike price and the exercise date are set by the contract seller and chosen by the buyer there are usually many contracts expiration dates and strike prices traders can choose from you pay a fee to purchase a call option this is called the premium it is the price paid for the option to exercise if at expiration the underlying asset is below the strike price the call buyer loses the premium paid this is the maximum loss the buyer can incur the call option buyer may hold the contract until the expiration date at which point they can execute the contract and take delivery of the underlying they can also choose not to buy the underlying at expiry or they can sell the options contract at any point before the expiration date at the market price of the contract at that time if an option reaches its expiry with a strike price higher than the asset s market price it expires worthless or out of the money 1long vs short call optionsthere are two basic ways to trade call options a long call option and a short call option a long call option is the standard call option in which the buyer has the right but not the obligation to buy a stock at a strike price in the future the advantage of a long call is that it allows the buyer to plan ahead to purchase a stock at a cheaper price many traders will place long calls on dividend paying stocks because these shares usually rise as the ex dividend date approaches then on the ex dividend date the price will drop the long call holder receives the dividend only if they exercise the option before the ex date image by sabrina jiang investopedia 2022for example you might purchase a long call option in anticipation of a newsworthy event like a company s earnings call while the profits on a long call option may be unlimited the losses are limited to premiums thus even if the company does not report a positive earnings beat or one that does not meet market expectations and the price of its shares declines the maximum losses the buyer of a call option will bear are limited to the premiums paid for the option as its name indicates a short call option is the opposite of a long call option in a short call option the seller promises to sell their shares at a fixed strike price in the future short call options are mainly used for covered calls by the option seller or call options in which the seller already owns the underlying stock for their options selling an option without owning the underlying is known as a naked short call the call helps contain the losses they might suffer if the trade does not go their way for example their losses would multiply if the call were uncovered i e they did not own the underlying stock for their option and the stock appreciated significantly in price 