Basics of Call Options: The Right to Buy

'A Call Option is basically a contract that gives you the RIGHT to BUY 100 shares of stock at a specifi c price (called the Strike Price)on/before an expiry date.

A Call Option is typically stated this way…

AIG Jan 65 Call

For example, if you buy an ‘AIG January 65 Call’ contract, it means that you now have the RIGHT to buy 100 shares of the AIG Shares at $65 on or before the third Friday of January (Options always expire on the third Friday of the expiry month).

So, no matter what happens to AIG’s share price, you have the right to always buy it at $65! If AIG’s shares price goes up to $100, you can still buy it at $65 (what a sweet deal). If AIG’s share price goes to down $20, you can still buy it at $65 (although you probably would not be so unintelligent to do so). However, this special right only lasts until the expiration month stated (in this case, January).

Because it is a RIGHT, you can CHOOSE to buy the shares at $65 or CHOOSE not to. If you choose to buy the stock at $65, it means you have EXERCISED your option. If you choose not to, then you will let your options expire.'


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