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A call option is a financial contract that gives you the right to buy a share at a predetermined price within a specific period. You are not obligated to actually buy the share. You pay an amount for this right, which is called the premium.
A call option is often used when you expect a share to rise.
When you buy a call option, you agree on a price at which you may buy the share. This price is called the strike price. If the market price rises above this agreed price, your right to buy becomes more valuable. .
If the price remains below the strike price, the contract has little or no value. The advantage is that you can respond to a price increase with a relatively small amount of capital. The maximum loss for the buyer is the premium paid.
You therefore do not buy the share itself, but the right to buy it later at a fixed price.
Short example:
Suppose a share currently costs €30. You buy a call option that allows you to buy the share over the next three months for €35. You pay €1 per share for this right.
One month later, the share rises to €45. You may still buy the share for €35. The €10 difference per share makes your option valuable. Because you paid €1, you have €9 profit per share remaining.
If the share stays below €35, for example at €32, you do not exercise your right. You only lose the €1 you paid for the option.
Disclaimer: Investing involves risks. Our analysts are not financial advisors. Always consult a professional advisor when making financial decisions. The information and tips provided on this website are based on the personal insights and experience of our analysts and are intended for educational purposes only.
