Definition of "Call Option"

A contract that gives the holder the right to buy a specified number of shares of a particular stock, stock index, or dollar face value of bonds at a predetermined price--called the "strike price"--on or before the option's expiration date. For this right, the holder (buyer) pays the writer (seller) a premium. The holder profits from the contract if the stock's price rises. If the holder decides to exercise the option (as opposed to selling it), the writer must give up ownership of the security.