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Purchasers of call options acquire the right, but
not the obligation, to purchase a particular stock at a specified
price (the strike price) at any time before the option
expires.
The purchaser of a call option makes money when
the price of the underlying stock goes up. The purchaser of a call
option limits their risk to the premium paid plus the commission
fees.
Sellers of call options must commit to sell an
underlying stock to the options purchaser for the strike price if
called up on to do so before the option expires. This is called
exercising the option.
A call option is in the money if the
underlying stock price is higher than the strike price.
A call option is out of the money if the
underlying stock price is lower than the strike price.
For example if a stock rises to $50 and your
strike price on a call option is $45, then you can purchase the
stock for $45 and sell it for $50. Provided your purchased each call
option for less than $5 you make a profit.
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