Understanding Call Options in Trading

What is a call option?

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...

ScenarioOutcome
Asset price rises significantly above the strike priceBuyer profits with unlimited potential; seller faces unlimited loss
Asset price remains below the strike priceBuyer loses premium paid; seller keeps the premium
Option expires worthlessBuyer 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

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