The Risk of Buying Call Options

Buying call options locks in the right to buy the underlying financial product at a specified price.

A call option gives you the right, but not the obligation, to buy the underlying investment (stock or other financial product) at a specified price by the expiration date of the option. If you buy the investment, it's called "exercising the option." The risk of buying call options is that you do not exercise the options and you lose the money you paid to buy them.

Call Option Basics

A call option specifies four things: the name of the underlying financial product, the price at which you can buy that product (called the strike price or exercise price), the expiration date of the option and how much you pay (the premium) for the option plus the broker's commission.

Options Rationale

You only buy a call option if you expect the price of the underlying financial product to go up and you want to have the right to buy the product at a lower price. If the price of the underlying financial product goes above the strike price, the option is said to be in the money. You then have an immediate gain if you exercise the option.

Risk of Call Options

As a call option buyer, your risk of loss is limited to the amount of the premium you paid for the option. You lose this money if you do not exercise the options.

References

• The Options Industry Council: Benefits and Risks
• The Investment FAQ: Subject: Derivatives --Stock Option Basics
• The Options Industry Council: Options FAQ