A Call Option is a derivative contract that gives the buyer the right (but not the obligation) to purchase an underlying asset at a predetermined price (strike price) by a certain expiration date.
Effects of Buying a Call Option
- Right to Buy: When you buy a call option, you secure the right to purchase the asset at the strike price, but you are not obligated to do so.
- Maximum Loss: Your maximum loss is limited to the premium you paid for the option.
- Profit Potential: Your profit potential is unlimited, depending on the asset's price appreciation.
Effects of Selling a Call Option
- Premium Income: The seller of a call option collects a premium but must provide the asset if the buyer exercises the option.
- Limited Profit: The seller’s profit is limited to the premium received.
- Unlimited Risk: The seller's losses can be limitless if the asset’s price rises significantly.
Example:
You buy a call option for Tata Motors shares with:
- Strike price: ₹1,000
- Premium paid: ₹100
- Expiration: 1 month
If the share price rises to ₹1,200 within that month:
- You can buy the shares at ₹1,000 and sell them at ₹1,200.
- Net profit = ₹1,200 – ₹1,000 – ₹100 = ₹100 per share.
If the price stays below ₹1,000, the option expires worthless, and your maximum loss is the ₹100 premium paid.
What if...
| Scenario | Outcome |
|---|
| Asset price rises significantly above the strike price | Buyer profits with unlimited potential; seller faces unlimited loss |
| Asset price remains below the strike price | Buyer loses premium paid; seller keeps the premium |
| Option expires worthless | Buyer loses the premium; seller keeps the premium |
Tip: Call options are ideal for bullish traders looking to profit from asset price increases with limited risk.
Last updated: 27 Jun 2025
Related Articles
When does the buyer & seller of a call option benefit in the stock market?
In options trading, a call option gives the buyer the right (but not the obligation) to buy the underlying asset at a specified strike price before the option expires. The dynamics of who benefits—buyer or seller—are based on the price movement of ...
What is the moneyness of an option?
Moneyness is a key concept in options trading that indicates whether exercising an option would lead to a profit if done immediately. It describes the relationship between the option’s strike price and the current market price of the underlying ...
Is the buyer of an option subjected to Physical Settlement?
Yes, according to SEBI guidelines, all In The Money (ITM) stock options contracts are physically settled, regardless of whether you are the buyer or the seller. This means if you hold an ITM options position at expiry, you must either provide or ...
What is Periodic Call Auction?
Periodic call auctions are mechanisms introduced by exchanges to improve price discovery in illiquid stocks — those with very low trading volumes. These auctions occur at specific intervals during the day and are designed to ensure fair and ...
What is a put option?
A Put Option is a type of derivative contract that grants the buyer the right, but not the obligation, to sell a specified amount of an underlying asset at a set price (strike price) within a specified timeframe. Effects of Buying a Put Option Market ...