Call option

In finance, a call option, is a contract between the buyer and the seller of the call option to exchange a security at a set price. The buyer of the call option has the right, but not the obligation, to buy an agreed quantity of a particular commodity or financial instrument from the seller of the option at or before a certain time for a certain price. This effectively gives the buyer a long position in the given asset. The seller is obliged to sell the commodity or financial instrument to the buyer if the buyer so decides. This effectively gives the seller a short position in the given asset. The buyer pays a fee for this right. The term "call" comes from the fact that the owner has the right to "call the stock away" from the seller.

Price of options

Option values vary with the value of the underlying instrument over time. The price of the call contract must act as a proxy response for the valuation of:

the expected intrinsic value of the option, defined as the expected value of the difference between the strike price and the market value, i.e., max.
the risk premium to compensate for the unpredictability of the value
Changes in the volatility of the base asset
the time value of money reflecting the delay to the payout time

The call contract price generally will be higher when the contract has more time to expire and when the underlying financial instrument shows more volatility or other unpredictability. Determining this value is one of the central functions of financial mathematics. The most common method used is the Black–Scholes model, which provides an estimate of the price of European-style options.