Difference between a call option seller & buyer

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A call optionoften simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option.

The seller or "writer" is obligated to call option buyer the commodity or financial instrument to the call option buyer if the buyer so decides. The buyer pays a fee called a premium for this right. The term "call" comes from the fact that the call option buyer has the right to "call the stock away" from the seller.

Option values vary with the value of the underlying instrument over time. The call option buyer of the call contract must reflect the "likelihood" or chance of the call finishing in-the-money. The call contract price generally will be higher when the contract has more time to expire except in cases when a significant dividend is present and when the underlying financial instrument call option buyer more volatility.

Determining this value is one of the central functions of financial mathematics. The most common method used is the Black—Scholes formula. Importantly, the Black-Scholes formula provides an estimate of the price of European-style options.

Adjustment to Call Option: When a call option is in-the-money i. Some of them are as follows:. Similarly if the buyer is making loss on his position i. Trading options involves a constant monitoring of the option value, which is affected by the following factors:.

Moreover, the dependence of the option value to price, volatility and time is not linear — which makes the analysis even more complex. From Wikipedia, the free encyclopedia. This article is about financial options. For call options in general, see Option law. This article needs additional citations for verification.

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Why do you recommend this news source? A call option is a financial instrument that gives the buyer the right, but not an obligation, to buy a set quantity of a security at a set strike price at some time on or before expiration. In this sense, a call option is very similar to a warrant. The decision of the best time to exercise the call depends on whether it is an American option or European option.

If and when the buyer decides to exercise the option, the counterparty who sold, or wrote the call must sell to the buyer the security at the agreed-upon strike price, even if the security's market price has risen above the strike price. In other words, when you buy a call option, you are buying the right to buy a stock at the strike price, regardless of the stock price in the future before the expiration date.

Since the payoff of purchased call options increases as the stock price rises, buying call options is considered bullish. To compensate you for that risk taken, the buyer pays you a premium, also known as the price of the call. The seller of the call is said to have shorted the call option , and keeps the premium the amount the buyer pays to buy the option whether or not the buyer ever exercises the option. If this occurs, the option expires worthless and the option seller keeps the premium as profit.

Since the payoff for sold, or written call options increases as the stock price falls, selling call options is considered bearish. From the makers of. Unable to complete your request. Please refresh your browser. See more recent news.

Call Options For Dividend Investors. SAIL through with call options. Investors in American Express Co. AXP saw new options begin trading today, for the December 15th expiration. ET enlightens the reader on the difference between a call option seller or writer and a call option buyer. Suggest other news sources for this topic. This article is part of WikiProject Definitions.

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