Call option

Infinance,acall option,often simply labeled a "call",is acontractbetween the buyer and the seller of the calloptionto exchange asecurityat a setprice.^[1]The buyer of the call option has the right, but not the obligation, to buy an agreed quantity of a particularcommodityorfinancial instrument(theunderlying) from the seller of the option at or before a certain time (theexpirationdate) for a certain price (thestrike price). This effectively gives the owner alongpositionin the given asset.^[2]The seller (or "writer" ) is obliged to sell the commodity or financial instrument to the buyer if the buyer so decides. This effectively gives the seller ashortpositionin the given asset. The buyer pays a fee (called apremium) for this right. The term "call" comes from the fact that the owner has the right to "call the stock away" from the seller.

Price of options

Option values vary with the value of the underlying instrument over time. The price of the call contract must act as a proxy response for the valuation of:

theexpected intrinsic valueof the option, defined as the expected value of the difference between the strike price and the market value, i.e., max[S−X, 0].^[3]
therisk premiumto compensate for the unpredictability of the value
thetime value of moneyreflecting the delay to the payout time

The call contract price generally will be higher when the contract has more time to expire (except in cases when a significantdividendis present) and when the underlying financial instrument shows morevolatilityor other unpredictability. Determining this value is one of the central functions offinancial mathematics.The most common method used is theBlack–Scholes model,which provides an estimate of the price of European-style options.^[4]

References

^O'Sullivan, Arthur;Sheffrin, Steven M.(2003).Economics: Principles in Action.Upper Saddle River, New Jersey 07458:Pearson Prentice Hall.p.288.ISBN 0-13-063085-3.{{cite book}}:CS1 maint: location (link)
^Natenberg, Sheldon (1994).Option volatility and pricing strategies: advanced trading techniques for professionals([2nd ed., updated and exp.] ed.). New York: McGraw-Hill.ISBN 0-585-13166-X.OCLC 44962925.
^Hull, John (2017).Options, Futures, and Other Derivatives 10th Edition.Pearson. pp. 231–246.ISBN 978-0134472089.
^Fernandes, Nuno (2014).Finance for Executives: A Practical Guide for Managers.NPV Publishing. p. 313.ISBN 978-9899885400.

[1] O'Sullivan, Arthur;Sheffrin, Steven M.(2003).Economics: Principles in Action.Upper Saddle River, New Jersey 07458:Pearson Prentice Hall.p.288.ISBN 0-13-063085-3.{{cite book}}:CS1 maint: location (link)

[2] Natenberg, Sheldon (1994).Option volatility and pricing strategies: advanced trading techniques for professionals([2nd ed., updated and exp.] ed.). New York: McGraw-Hill.ISBN 0-585-13166-X.OCLC 44962925.

[:0-3] Hull, John (2017).Options, Futures, and Other Derivatives 10th Edition.Pearson. pp. 231–246.ISBN 978-0134472089.

[4] Fernandes, Nuno (2014).Finance for Executives: A Practical Guide for Managers.NPV Publishing. p. 313.ISBN 978-9899885400.

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[2]

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Price of options

See also

References