Which of the following accurately defines a call option?

Which of the following accurately defines a call option?

• A. An option to sell an asset at a specified price
• B. An option to buy an asset at a specified price
• C. An obligation to purchase an asset at market price
• D. A right to sell an asset at market price

Answer: (B)

A call option is a financial contract that gives the holder the right, but not the obligation, to buy an underlying asset at a predetermined price, known as the strike price, before or at the expiration date. This definition underlines the key characteristics of a call option: it grants the purchaser the opportunity to purchase an asset, which might include stocks or commodities, potentially benefiting from favorable price movements. By exercising a call option, the holder can buy the asset at the agreed price, which could be advantageous if the market price of the asset rises above the strike price. In such scenarios, this option can yield profits since the holder can acquire the asset at a lower price compared to the current market value. Other choices do not reflect this definition accurately, as they refer to selling options or obligations instead of the right to buy, misrepresenting the fundamental nature of a call option. These distinctions are crucial for understanding derivatives and options trading.

A call option is a financial contract that gives the holder the right, but not the obligation, to buy an underlying asset at a predetermined price, known as the strike price, before or at the expiration date. This definition underlines the key characteristics of a call option: it grants the purchaser the opportunity to purchase an asset, which might include stocks or commodities, potentially benefiting from favorable price movements.

By exercising a call option, the holder can buy the asset at the agreed price, which could be advantageous if the market price of the asset rises above the strike price. In such scenarios, this option can yield profits since the holder can acquire the asset at a lower price compared to the current market value.

Other choices do not reflect this definition accurately, as they refer to selling options or obligations instead of the right to buy, misrepresenting the fundamental nature of a call option. These distinctions are crucial for understanding derivatives and options trading.