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How a Call Option Trade Works

You can think of a call option as a bet that the underlying asset is going to rise in value. The following example illustrates how a call option trade works.

Assume that you think XYZ stock in the above figure is going to trade above $30 per share by the expiration date, the third Friday of the month. So you buy a $30 call option for $2, with a value of $200, plus commission, plus any other required fees.

If you’re right, and XYZ is up to $35 per share by the expiration date, you can exercise your option, buy 100 shares of XYZ at $30, which costs you $3,000, and then sell it on the open market at $35, realizing a gain of $500 minus your initial $200 premium, commissions, and other fees.

In this case, your option is in the money, because the strike price is less than the market price of the underlying asset.

When you, the option holder, put in your order, the dealer searches for someone on the other side of the trade, in other words the option writer, with the same class and strike price of the option. The writer is then assigned the trade and must sell his shares to you, if you exercise the option.

So, a call assignment requires the writer, the trader who sold the call option to you, to sell his stock to you. A put assignment, on the other hand, requires the person who sold you the put on the other side of the trade (again, the put writer) to buy the stock from you, the put holder.

You have two other possibilities: You can hold the stock, knowing that you have a $5 cushion, because you bought it at a discount, or you can sell the option back to the market, hopefully at a profit.

According to the CBOE, most options never are exercised. Instead, most traders sell the option back to the market.

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