Question

Which of the following explains buying a call option? You receive money You pay money You...

Which of the following explains buying a call option?

  1. You receive money
  2. You pay money
  3. You have the right to buy the underlying stock
  4. Answers a and c
  5. Answers b and c
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Answer #1

Option e(Answers b and c) explains buying a call option.

Note:

The financial contracts that gives the option buyer the right, but not the obligation, to buy financial contracts (stock, bond, commodity or other asset) at a specified price within a specific time period are known as Call options.

A call buyer makes profits when there is an increase in price of the underlying assets.

A call buyer pays the market price of the call option, called the premium. The premium is paid as the price for the rights of the call option. If at the expiry date, the underlying asset is below the strike price, the maximum amount that the call buyer loses is the amount of premium paid.

So, option b(You pay money) is considered as the money paid as the premium for the call option.

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