A call option is an agreement. If you buy a call option, you have a right to buy the stock at a particular price before a specific time (Expiry). Next, lets see an example.
Call Option Example
If you buy 2500 Call option of reliance by paying Rs. 100, you now have a right to buy the reliance stock at Rs. 2500 before expiry even if the price becomes 3000.
When is it bought?
A call option can be purchased when you are aggressively bullish on a stock.
Whats the risk & reward?
Buying a call option has unlimited profit potential. The risk is limited to the price paid to buy the stock. In our last example, we paid Rs. 100 to purchase reliance call option which is also the max possible loss.
Can you square off the position before expiry?
Yes you can sell the call option before expiry. In our last example, if the 2500 reliance CE premium increases to 110, you may sell it at a profit of Rs. 10.