10th Nov 2009 by JonB
A call option contract gives you the right to buy 100 shares of stock (or some other asset) at a certain price for a certain amount of time. Call options are a way of taking advantage of a stocks appreciation, therefor are bought when one thinks a stock price is going to rise.
For example, let's say you think shares of XYZ are going to rise in value so you bought 1 contract of December 2001 $15.00 calls. The contract cost you $2.00. You now have the right to buy 100 shares XYZ stock at $15.00 each. If the stock price only makes it to $12.00, you obviously wouldn't want to exercise your option to buy them for $15.00. but if the stock rises all the way to $25, the option you bought for $2.00 could be worth the share price ($25) minus the cost of the stock ($15) or $10. That's a pretty good return!
Like This Answer?
This answer is the subjective opinion of the writer and not of FinancialAdvisory.com