Call options are derivative agreements that provides the option purchaser with the right, but not the obligation, to purchase a stock, bond or a commodity at a particular price within a particular period of time. The stock, bond, or commodity here is referred to as the underlying asset.
The purchaser of a call option benefits when the stock price witnesses a rise.
A call option contract is the opposite of a put option contract, which provides the option holder the right to sell the underlying asset at a particular price on or before option expiry.
For options on stocks, call option contracts provide the option holder the right to purchase 100 shares of an organization at a particular price, referred to as the strike price, up until a particular date, referred to as the date of option expiry.
For instance, a single call option may provide an option holder the right to purchase 100 shares of HDFC stock at Rs. 1800 up until the option expiration date in 3 months.
There are numerous expiry dates and strike prices for traders to select from. As the value of HDFC stock rises, the price of the option goes up, and the other way around.
The buyer of the call option may hold on to it till the option expiry, at which, they can choose to accept the delivery of the 100 shares of the security or sell the option at any point before its expiry at the market price of the option at that moment.