What is a Call Option?

A Call option is a contract that gives the option holder the option to buy shares of stock at a specified price at a specific time.

It is definitely not an obligation for the call option to buy these shares (or exercise). Call Options have an expiration month, with a specific expiry date. If the Call Option has a July 2009 expiration date, then it expires on July 17th. They always expire on the third Friday of their expiration month.

Call Options fall under 3 categories. These are: In-The-Money, At-The-Money and Out-Of-The-Money. In the Money call options mean that their strike price is lower than the market price of the underlying security. At the money means the strike price is in line with the market price of that security and out of the money means the strike price is higher that the market price of that security.

So, if we were to buy a July 2009 Apple Call Option with a strike price of $100 and shares of Apple are currently trading at $120, we are considered "in the money." By the 17th of July (expiration date), we can exercise our call option, or in other words, oblige the writer to sell us 100 shares of Apple at $100 while it's trading at $120. This will give us an instant profit of $20. One call option contract includes 100 shares, so we would instantly make a profit of $2,000 (100 shares x $20).

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