Call Option

There are two kinds of stock options: calls and puts.

A call option is a tradable security that gives the buyer of the call option the right to buy stock at a certain price ("strike price") on or before a certain date ("expiration date"). Likewise, the seller of a call option is obligated to sell stock at a certain price by a certain date if the buyer chooses to exercise his right.

For example, a "January 50 call option on ABC stock" gives the buyer of the call option the right to pay $50/share for 100 shares of ABC stock any time between now and January. If that buyer decides to exercise his right to buy the stock at $50/share then the person who sold him the call option is obligated to sell 100 shares of ABC stock to him at $50/share.

The buyer and seller agree in advance on (1) the stock involved (called the "underlying security" or "underlying"), (2) the duration of the option ("expiration date"), (3) the exercise price ("strike price"), and (4) the price of the option. Like stocks, there are many investors buying and selling options every day and each has a bid and ask price quoted by the exchanges.

A put option is the opposite of a call option: it is the right to sell a stock at a certain price by a certain date. Born To Sell is not concerned with put options and will focus this tutorial on call options and covered calls.

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