Article

Call Option
June 07 , 2012

We assume you know what an option is – the idea being that you pay a small charge to get a choice to buy or sell something later at a predetermined price. In a call option, the choice is to buy the product. Thus, a call option is typically used by someone who expects to need the product later.

Consider a seed crusher expecting a wanting a crop of mustard seeds to crush in four months time. His concern would be finding a seller at that time, and fixing the price so that he is protected against rise in seed prices in the interim four months. He can do this is by buying call options on mustard seeds, at a price he expects to pay. Obviously, the lower he expects to pay (relative to the current prevailing price), the higher he will have to pay to buy the call option. But thereafter, his worries about procuring the mustard seeds are taken care of.

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