What is Call Option? (Part 2)

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Example:
Company ABC is currently trading at $23 per share. You believe the stock will be going up within a short time period. Hence you buy one contract of Call option that gives you the right, but not the obligation, to buy 100 shares of the company anytime in the next 90 days for $25 per share. The option�s price is $0.5, so you will buy one option contract for $50 (multiplied by 100 shares per contract).

If your prediction is right and the stock rises to $ 28 per share before the option expires, there are 2 alternatives you can do:
1) You could exercise your option and buy 100 shares at $25 per share and sell them for an immediate profit of $2.5 per share ($28 - $25 = $3 - $0.5 for the option premium = $2.5 per share). However, as a practical matter, options traders rarely choose this alternative.

2) You could simply sell the option contract for a profit without actually buying the shares of stock. When the stock price increases to $28, the option price would at least be worth of $3.00 (intrinsic value only). Hence, you will also gain $2.5 per share ($3 - $0.5 for the option premium = $2.5 per share). This is what options traders will normally do.

On the other hand, if your prediction is wrong and the stock moves nowhere or drops from the original $23 to $21 per share, you would simply let the option expire worthless and suffer only a $50 loss (the option price), because in this case, most likely the option would have no value.