Call option: Overview, definition, and example
What is a call option?
A call option is a financial contract that gives the buyer the right—but not the obligation—to buy an asset at a set price within a specific period. It’s commonly used in stock trading, real estate, and business agreements. A call option allows a buyer to lock in a purchase price, even if the asset’s market value increases later.
Why is a call option important?
A call option provides flexibility and potential profit opportunities. If the asset's value goes up, the buyer can exercise the option and buy at the lower agreed-upon price. If the value drops, the buyer can choose not to buy, limiting their risk to the cost of the option itself.
For businesses and investors, call options can be useful for hedging against price increases, securing future purchases, or speculating on market movements. In real estate or business deals, a call option can allow a party to secure the right to buy a property or shares in a company without immediately committing to the purchase.
Understanding call option through an example
Imagine you’re a small business owner interested in buying a commercial property. The seller offers you a call option allowing you to purchase the property for $500,000 anytime in the next six months. You pay a $10,000 fee for this option.
If the property’s value rises to $600,000, you can exercise your option and buy it for $500,000, immediately gaining $100,000 in value. If the market drops and the property is worth only $450,000, you can walk away, losing only the $10,000 fee but avoiding a larger loss.
An example of a call option clause
Here’s an example of how a call option clause might appear in a contract:
“The Buyer shall have the exclusive right, but not the obligation, to purchase [asset] from the Seller at a fixed price of [agreed price] within the period of [timeframe]. The Buyer shall pay a non-refundable option fee of [amount], which shall not be applied toward the purchase price. If the Buyer does not exercise the option within the specified period, this right shall expire, and the Seller shall be free to sell the asset to any third party.”
Conclusion
A call option is a powerful tool that gives businesses and investors the ability to lock in future purchases while minimizing risk. It provides a strategic advantage, allowing buyers to benefit from price increases without the obligation to follow through if the market shifts unfavorably.
For SMBs, using call options wisely can open up new opportunities—whether for securing real estate, investment assets, or business acquisitions—while keeping financial commitments under control.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.