What is a Call Option?

A call option is one of two types of options, the other being a put. When an investor buys a call option, they have the right to purchase the security (such as a stock or ETF) upon which the option is based at its strike price, up until the time the option expires. Let's say an investor buys a call option on XYZ stock, with a strike of $50. XYZ stock rises to $60, and instead of paying the market price of $60 to acquire it, an investor could exercise the option and buy it for $50. When a call's underlying rises in value, the value of the call also tends to increase which means that instead of exercising, an investor could potentially sell the call option back to the market, as it now has intrinsic value since the underlying stock is $10 above its strike price. Time value and intrinsic value are important option concepts, and you can learn more about them on our site.

An investor could also sell a call which could lead to collecting income, though the strategy is not without potentially significant risks. Also, it's important to know that while individual calls can be bought and sold in the market, many option strategies, such as spreads, involve more than one call or even combine calls and puts.