Options & Derivatives

Call Option

A contract giving the right, but not the obligation, to buy an asset at a fixed strike price.

Payoff at expiry is max(S - K, 0). Losses are capped at the premium; gains are unbounded.

Why the asymmetry matters. That capped downside is why more volatility raises a call's value: extra upside is worth something, extra downside is not, because you simply do not exercise.

Early exercise. Never optimal for an American call on a non-dividend stock - selling always beats exercising, because you would forfeit positive time value and the interest on the strike. The one exception is just before an ex-dividend date.

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