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What is a Call?

A call option is a type of financial instrument known as a derivative. It is basically an agreement between two parties to exchange ownership of a stock at an agreed upon price within a certain time period. The exchange of the stock is optional and the owner of the call option decides whether it takes place.

The agreed upon price of the exchange is called the strike price. The date on which the agreement expires is the expiry date of the call option. The amount of money required to purchase this call option is called the premium. If the exchange takes place, then one is said to have exercised the call option.

Call option premiums are always quoted per stock, but sold in lots of 100 shares minimum. Call options are always an agreement about being able to purchase the stock at the agreed upon price. Call options come in both European style and American style.

European style call options are sold on European exchanges, while American style call options are sold in North American exchanges. The difference is quite simple. European options can only be exercised on the expiry day, while American style options can be exercised at any time during the life of the call option.

Call options are frequently described by the relationship of the strike price to the stock price. A call option for which the strike price is equal to the stock price is said to be an "at the money" call option. If the strike price is above the stock price, the call option is said to be an "out of the money" call option. Finally, if the strike price is less than the stock price, the call option is said to be "in the money".

What is Out of the Money?
What is In the Money?
What is At the Money?