(ii)a set price.
(2) an exercise date (ie, the date when the underlying stock is actually bought); and
(3) a predetermined price.
EXAMPLE:
Today, Joe buys a call option. It gives him the right to buy 1 share of XYZ stock – in two months (at $20 per share). The stock option costs $1 (which Joe pays immediately). He hopes that – in two months – the stock will be worth more-than $20 (per share). As it turns out, the XYZ stock is worth $30 at the exercise date (ie, 2 months later). Therefore, Joe exercises his call option. Thereby paying [only] $20 for a $30 stock.
EXAMPLE:
Today, Jane buys a call option. It gives her the right to buy 1 share of XYZ stock – in two months (at $40 per share). The stock option costs $2 (which Jane pays immediately). She hopes that – in two months – the stock will be worth more-than $40 (per share). As it turns out, the XYZ stock is worth $30 at the exercise date (ie, 2 months later). Therefore, Jane does not exercise her call option. Thus, she does not buy the XYZ stock.
EXAMPLE:
Today, Kendra buys a call option. It gives her the right to buy 1,000 shares of XYZ stock – in two months (at $40 per share). The stock option costs $2 per share (totaling $2,000 – which Kendra pays immediately). She hopes that the stock price rises during the two-month wait (ie, it gets “in-the-money”). One month later, the underlying stock price rises to $50/share. Moreover, her call option also rises in value; thereby reaching $5 per share. Therefore, Jane sells her call option (at $5/share); netting a $3,000 total profit.
- AMERICAN CALL OPTION
- a version that allows the option owner to “call” his/her option at any time (ie, [even] before the exercise date). As such, American call options cost more [than standard/European call options).
- ASIAN CALL OPTION
- a version that pays off based on the stock’s average price (instead of based on its spot price)
- BERMUDAN CALL OPTION
- a version that allows the option owner to “call” his/her option at several pre-determined times (ie, [even] before the exercise date). Usually, these pre-determined times are set at the beginning of each preceding month [before the exercise date]. As such, Bermudan call options cost more [than standard/European call options).
- EUROPEAN CALL OPTION
- the standard version (which allows the option owner to “call” his/her option on the exercise date – only)
