"It's not over until the fat lady sings," says the old baseball or opera expression (depending on whom you ask). The call over is the act of the fat lady singing, at least in a part of the options market.
In call options trading, a buyer is predicting that the price of an underlying asset (such as a stock) will go up. He or she has the right, but not the obligation, to exercise the option when the stock hits a previously agreed upon price known as the "strike price." When the last trading day arrives before the option expires, the buyer must decide whether to exercise it (buy the shares) or let it expire. He or she would let it expire if the current market rate was lower than the option strike price. In either case, the call is over.
As just one example of a call option deal, let's say Peter owns 25,000 shares of Call Me Successful, Inc. that are valued at $3.75 a share. Looking at the general direction of the market, he starts to worry that the price could go down. So he decides to protect himself and sells a call option to Tom, who thinks the price will go up. Their contract states that Tom will buy Peter's 25,000 shares six months from now at $4.75. When the price of Call Me Successful goes down to $3.50 when the six months are up, Tom decides to let the option expire since he can buy the shares cheaper in the open market. The call is over.
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Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
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