Options has always been a intriguing subjects and somehow very confusing to a lot of people. In this post, I will try to simplify and explain it in a lay man terms, for call options and in my next post, I will explain on Put Options.

We actually uses a lot of call options in our daily life. We just do not realize it or it is not called “Call options” here are some of the normal call options most people encounter in their daily life but they just do not realize it.

For examples:

1. When you are buying a house, you place a booking fee of 1% or a sum of money so that the seller cannot sell it to another person for a certain period of time until you come up with the payment of the  downpayment of 20% or more to carry on with the purchase, however when you decided on the next day that you have made a bad choice as that house value you realized is not worth the sales value, you can decide to stop the purchase process and forfeited your booking fee of 1% or so.

By placing the booking fee, you became the buyer of  the call option which is the right to purchase the house at the agreed price for a limited time. While the seller of the house being in possession of the physical house became the seller of the call option, he sells you the right to buy his house and therefore he has the obligation to deliver the physical house to you upon the full payment of the house given.

2. Shopping Vouchers - is another type of call options that we uses a lot in our life but we just do not realize it. We bought a shopping voucher normally with specific value in each of the voucher that will be valid until a certain time. You became the buyer of the call options in this case and the merchant became the seller of the call options. What happens when you did not use your shopping voucher till the end of the validity date? You will not be able to use those vouchers anymore as they became worthless and you lost all the money paid to buy those vouchers.

Options whether call or put has validity date which we traders called expiry date of the option. When you think about it, actually our life do involve a lot in buying a call options, such as buying a prepaid parking tickets, prepaid one year access to recreation park or to the zoo, prepaid phone cards, buying our home appliances by placing a deposit first and full payment upon delivery.

In many events of our life, we actually in one form or another transact with buying or selling an “option” though the terms is not at such.

Call Options in Stock Market or in future market works in the same manners as the above. When you buy a call option, means you have the right to buy the stock which is the underlying asset of that options at the later date with limit to the expiry date of the option contracts at the agreed price

When you buy a call option, you have the Right to Buy the underlying stock - The key word here is the Right to Buy which means you are in control which also means you can decide whether to buy or not to buy. When you decided to Buy the stock, what you need to do is just Exercise your options, as a buyer you exercise your right.

However as a Seller, when you sell a call option, you no longer have the right, but now you have an OBLIGATION that you should fulfilled by delivering the asset when the buyer of your call option decided to use his or her right to buy the underlying stock. Which is called assignement - this is what happen when someone exercise their right, your call options has got assignment. As a Seller you have been assigned to fulfilled your obligation.

Call Options is not as complicated as it sounds but you need to be real careful when you are trading options as it can become a very expensive learning experience.

Hope that this brief explaination can help to interest you more to know about one of the most flexible and powerful financial instrument available.