A "call" option allows the owner to buy 100 shares of a given stock at a given price, called the strike price. This right is good only for a certain period of time. American-style options allow the owner to do this (called "exercise" the option) at any time up to the time the option expires (called "expiry" or "expiration date").
This would only be done if the price of the shares has risen above the strike price.
For example, suppose you own one option to buy XYZ at $60 on or before the third Friday of November. If the price of XYZ is $74 on that date, you could exercise the option and pay $6,000 to buy those shares and immediately sell them for $7,400, pocketing the $1,400 difference. For this chance (after all, the stock could also be trading at $54 on that date, in which case you wouldn't exercise the option), you paid somebody a premium.
There are two people for each contract. For a call, the seller (hopefully) has 100 shares for each contract sold (option contracts are almost always in blocks of 100 shares) and is willing to sell the shares at the strike price. The seller is paid the premium, which he or she keeps regardless of what happens subsequently. The buyer is betting (literally) that the share price will be above the strike price by the expiry. If it is, he or she will exercise the option and get the shares. For this possibility, he or she pays a price (called the premium) ranging from a few cents to a few dollars per share.
The owner of the call option is said to be "long" the call.
The buyer is betting that the stock price will go up before the expiry date, while the seller is either betting that it will not or is content to sell the shares at the strike price.
Calls and other securities
Many bonds, preferred stocks, and related fixed income securities have call provisions. These provisions allow the issuer (the company) to call (buy back) the securities at a specified price on a specified date. Call provisions are somewhat like refinancing a mortgage for the company. They allow the company to call in outstanding debt and refinance the debt by reissuing the debt with a new security. This would only be done at a lower rate.
Some securities have complex call provisions with a schedule of payments required if the issue is called between specified dates. The details are listed in the prospectus for the issue. QuantumOnline does an excellent job of summarizing call provisions. They also provide links to the original prospectus for the issue. (But the bond ratings shown are when issued and may not be current.)
- Corporate bond
- Covered call
- Fixed income
- Preferred stock
- Stock option
- Binary outcome
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