What is a call option?

Call options are financial contracts that give the option buyer the right but not the obligation to buy a stock, bond, commodity, or other asset or instrument at a specified price within a specific time period. The stock, bond, or commodity is called the underlying asset. A call buyer profits when the underlying asset increases in price.

How do you sell a call option?

You sell a call option consisting of the right to purchase 100 shares of a stock before the expiration date of the contract for a set price. This part is the same no matter which type of call option you choose to sell. The reason for selling a call option is also the same: To profit by keeping the premium you charge for the contract.

What happens when a call option buyer exercises his right?

When a call option buyer exercises his right, the naked option seller is obligated to buy the stock at the current market price to provide the shares to the option holder. If the stock price exceeds the call option’s strike price, then the difference between the current market price and the strike price represents the loss to the seller.

What does a call option broker do?

Through your broker, you become the seller of a call option and collect the premium that the option is selling for. You are also responsible for selling the asset at the strike price, should the buyer choose to exercise.