Buy a Call: What Does It Mean? | SterlingTerrell.net

Buy a Call: What Does It Mean?

Call Option Payoff Chart

What does it mean to "Buy a Call" on a commodity, stock, or index?

This simply refers to: The buying of a call option.

A "call" option is the right to "buy."

(Whereas, a "put" option is the right to "sell.")

The most common example of options is in real-estate.

One buys the right, but not the obligation, to buy a property at a set price within the next so many days.

It is the same for an option on a stock or commodity.

Buying one call option on cotton at 70.00 cents/lb. gives me the right to buy 100 bales of cotton (or one futures contract on cotton) for 70.00 cents/lb. anytime between now and the option's expiration date.

If 2.00 cents/lb. is paid for the option, and the price of cotton goes up by 10.00 cents/lb, the profit is 8.00 cents/lb.

Buying a call option limits the potential loss to the premium paid for the option - while the potential gain is unlimited.