A call option grants its owner the right, but not the obligation to buy 100 shares of the underlying stock, at a fixed strike price per share and on or before a specific expiration date. The owner of the call acquires these rights in exchange for a premium paid for the option. The value of the option rises if the terms become more attractive before expiration.
If the market value moves higher than the fixed strike price, the option value rises; if it remains at or below the fixed strike price, the premium value falls. The call buyer is not obligated to exercise the option.
There are three choices:
The option may be allowed to expire worthless, which occurs if the current market value remains below the strike.
The contract can also be closed at a profit or loss, and sold on the exchange. The sale may occur at a loss; the option trader may realize that the position is not going to become profitable, and taking a partial loss is preferable to letting the contract expire, meaning the value would go to zero. Finally, the option owner can exercise that option and buy 100 shares at the fixed strike price.
For example, if the strike is $70 and current value per share is $96, exercise gets 100 shares at the fixed price of $70 per share, or $26 per share lower than current market value.