Call Option

An American call option is a contract that gives the holder the right but not the obligation to buy (i.e., to call in) specified securities at a specified price on or before a specified exercise date. For instance, if an investor buys one call option (normally consisting of 100 shares) on Reliance, he has the right to buy 100 equity shares of Reliance at a specified exercise price anytime between today and a specified date by paying option premium. The fact that the call holder is under no obligation to buy securities implies that he has limited liability. In case the price of the equity shares of Reliance falls at expiration date, he would prefer to walk away from the call contract. In other words, he would not exercise his right to buy equity shares of Reliance. In such a situation, his loss is equal/limited to the option premium paid by him at the time of contract. Should the price of Reliance shares increase, he would exercise his right to buy these shares and gain from the transaction. His gain is equal to the difference between the share price and exercise price minus the option premium.

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