What is a Call Option?
Updated: March 28, 2012 at 4:47 AM
Call Option Definition - A Call Option, often simply labeled a "Call", is a contract in which the Buyer has the right but not the obligation to purchase a particular security, commodity or currency for a given strike price on, in the case of European call options, or before, in the case of American call options, the expiration date. The Seller, or "Writer", is obligated to sell the underlying security, commodity or currency if the Buyer should so decide, and for this right the Buyer pays a fee, called a premium. The Buyer expects prices to rise, thereby increasing the value of his option. His downside risk is limited to the premium that he paid. When the price of the currency or the underlying instrument surpasses the strike price, the option is said to be "in the money". It is prudent to sell an "in the money" call option before it expires. Some brokers will automatically sell your "in the money" call option before expiration because they earn a commission, or if your account is sufficiently funded, your broker will buy the associated currency. You must then exit your position to realize your gain. If you wish to deal in currency options, be sure to check with your broker since not all forex brokers deal in options.
Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.