The buyer of a call option has the right, Call options: Right to buy versus obligation

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The Bottom Line An option is a financial instrument whose value is derived from an underlying asset. All options contracts give the holders the right, but not the obligation, to buy or sell in the case of a put the underlying - but what exactly does that mean?

Here, we take a closer look. Key Takeaways Call options contracts give holders the right, but not the obligation, to make money on laptop some underlying security at a pre-determined price by a set expiration time.

Unlike futures or forwards, this means that the call holder can decide whether or not to exercise that right and purchase the asset for that strike price. Otherwise, they can let the contract expire worthless.

Difference between a call option seller & buyer

If the option is exercised, however, the option writer seller will be obligated to deliver the underlying to the long at that price. It is the price paid for the rights provided by the call option. If at expiration, the underlying asset is below the strike price, the call buyer loses the buyer of a call option has the right premium paid - they are under no obligation to buy the stock for more than the market price is currently valuing the shares. If, however, it is above the strike price, the buyer can purchase the shares below market value and make a nice profit.

Thus, unlike other derivatives such as futures and forwards contracts, options contracts give the investor just that - the option - the make good on the contract.

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The buyer of an option is therefore not obligated to buy the stock at the the buyer of a call option has the right price. What About the Writer of the Call Option? On the other hand, a writeror seller, of a call option would be obligated to sell the underlying asset at a predetermined price if that call option is exercised by the long.

This is known as the call writer being assigned.

Call Option Definition

The writer of a call option is paid to take on the risk that is associated with being obligated to deliver shares. The investor hopes that the call will expire worthless. As a result, many holders of the call options exercise their options to buy. When Derivatives Are Obligations Unlike options, futures and forwards contracts are legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future.

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  • The stock, bond, or commodity is called the underlying asset.
  • Call options: Right to buy versus obligation
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If held at contract expiration, the underlying security must be delivered if short, or delivery must be taken if long.

The buyer of a futures or forward contract is taking on the obligation to buy and receive the underlying asset when the futures contract expires.

The seller of the contract is taking on the obligation to provide and deliver the underlying asset at the expiration date. Forwards are more customizable, but trade over-the-counte r OTC between counterparties.

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The Bottom Line Call options give the holder of the contract the right to buy the underlying at a pre-specified price. At or before expiration, if the underlying asset rises above that strike price, the holder can exercise the option, obligating the seller of the option to deliver those shares at that price.

If, however, the price fails to rise above the strike, the call holder can simply let his right expire without exercising it, and only lose the premium paid for the otion.

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