A “call option” is a right to be able to purchase a security at a pre-agreed price at a pre-agreed date or date range. Calls can take many forms.
In a European call option, the date is fixed. For example, one could pay $10 to have the right to purchase a barrel of oil for $100 on May 1. If the price of oil is below $100/barrel on May 1, one does not exercise the option and essentially loses their $10. If the price is above $100/barrel, one exercises the option and can re-sell the barrel for profit. If the price of oil is, for instance, $200, one exercises the option, pays the additional $100 and nets the additional $90.
In an American call option, the date is a range. For example, instead of having the right to redeem (“call”) the option on May 1, one would have the right to call the option any day between purchase and May 1. As a result, one can make a profit if the price ever rises above $100, even if it falls back below $100 on May 1. As a result, American call options are generally more expensive to purchase.
Almost all options are American or European call options. There are, however, less commonly used option styles, including the Bermuda (which allows several discrete opportunities to redeem), however these are very rare.
When the call options’ strike price has been met, it is considered “in the money”. When the strike price has not been met, it is considered “out of the money”. For example, suppose the price of a barrel of oil is $120. An option to buy a barrel at $100/barrel is thus “in the money”. An option to buy a barrel at $150/barrel is “out of the money”.
A “call” option is the opposite of a “put” option. A “put” option is the right to be able to sell a security at a pre-agreed price at a pre-agreed date or date range.