call option

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A call option (often shortened to call) is a contract that allows its owner to buy an asset or service from the seller at a certain price until a certain date. The buyer never has to purchase the assets, and the option will terminate at the specified date. People pay for call options because they offer chances of profit or safety in price, and a seller benefits if the assets sold fall in price after selling the call option.

For example, Sarah could buy a one year call option for $1,000 to buy 100 shares of Banana Inc. for $100 dollars each (this is also called a stock option), and Sarah would make a $9,000 profit if they used the call option when the market value rose to $200 ($20,000(value of 100 shares at $200) - $10,000(actual cost of 100 shares at $100) - $1,000(call option price) = $9,000). However, the seller could gain $1,000 from the call option sale and more if Sarah uses the call option when the market value remains below $100. 

[Last updated in June of 2021 by the Wex Definitions Team]