Call option
The right, but not the obligation, to buy the underlying at the exercise price. The buyer can lose no more than the premium; the writer's loss has no ceiling as the underlying rises.
Where you will meet it
Call option appears in 5 learning outcomes on the CFA syllabus. A few of them:
- Put a value on preferred stock that is neither callable nor convertible
“A call option belongs to the issuer, so it lowers value and caps the price near the call price when rates fall.”
- Contrast what lenders and shareholders are entitled to and what drives each group
“Equity therefore behaves like a call option on the firm's assets with a strike equal to the debt.”
- Work out what a call option pays at expiry
“At expiry a call option's payoff is max(0, S - X), where S is the price of the underlying and X the exercise price.”
- Explain how to value a convertible bond within an arbitrage-free framework
“A plain convertible is worth its straight value plus a call option on the shares covered by the conversion ratio.”
See also
Practise it
Practise call option until it is automatic: questions that explain every wrong option.
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