Definition: The right, but not the obligation, to purchase the shares of a company at a certain price (ie, the strike price) on or before a certain date (ie: its expiration date).
Example: Sidney purchases the right to buy Corpel’s shares for $25 any time between now and next January. The price is currently $20 per share. Sidney pays $2 per share (ie, the option premium) to own the call option.
Investeach explains: Options are very risky and are suitable only for people with substantial financial education and investing experience who truly understand them. In our example, unless Corpel’s stock reaches $25 by next January, the $2 per share Sidney paid will be completely lost! The stock has to reach $27 for him to begin making a profit.
Options can be bought and sold. For example, Sidney can sell a call option, allowing another investor to call from him shares of a stock he currently owns. This is referred to as selling a covered call.
Riddle me this:
1. What does a call option enable an investor to do?
2. Why are options suitable for advanced investors only?
3. What do we call the price the option allows the investor to buy the shares for?
4. What do we call the date on which the option goes away?
5. What do we call the amount the investor pays to own the option?
Opposite of: Put option