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Finance: What Is a Call Option? 25 Views


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What is a call option? A call option is a type of contract that lets the investor buy shares of a stock at a certain price and within a window of time. Calls are bought when investors think a stock will increase in value, because they are able to buy at a price that’s higher than what the stock is actually currently worth.

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Transcript

00:00

finance a la shmoop. what is a call option? option? option, where are you? okay

00:09

yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]

00:14

is the right to call or buy a security. the concept is easy the math is hard.

00:24

you think Coca Cola's poised for a breakout as they go into the new low

00:30

calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]

00:35

call option for $1. well that call option buys you the right

00:39

to then buy coke stock at 55 bucks a share anytime you want in the next

00:44

hundred and 20 days. so let's say Coke announces its new sugarless drink flavor

00:48

zero it's two weeks later and the stock skyrockets to fifty eight dollars a

00:53

share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]

00:59

so you buy the stock and you're all in now for fifty five dollars plus one or

01:04

fifty six bucks a share and your total value is now fifty eight bucks. well you

01:10

could turn around today and sell the bundle that moment, and you'll have

01:13

turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]

01:18

stock not skyrocketed so quickly well you would have lost everything. still you

01:23

lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]

01:27

options. as for Coke flavor zero turned out to be nothing more than canned water.

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