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 by a certain date.
Effects of Buying a Call Option: By buying, you secure the right to purchase the asset but aren't obligated to do so. Your maximum loss is the premium you've paid. However, your profit potential is unlimited, depending on the asset's price appreciation.
Effects of Selling a Call Option: As the seller, you earn the premium but are obligated to provide the asset if the buyer chooses to exercise the option. While your profit is limited to the premium, your losses can be limitless if the asset's price significantly rises.
Let's say you purchase a call option for shares of Tata Motors at a strike price of ₹1,000, with a one-month expiration, and pay a premium of ₹100. If the share price escalates to ₹1,200 within that month, you can buy the shares at ₹1,000 and immediately sell at ₹1,200, gaining a healthy profit even after deducting the premium. However, if the price stays below ₹1,000, you might let the option expire, costing you only the ₹100 premium.
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