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What is a call option?​

A call option is a contract that gives the buyer the right to buy an asset (like a stock or ETF) at a specific price (called the strike price) before a certain date.

For example: 

  • An investor buys a call option on a stock or ETF with a strike price of $100. 
  • If that security rises to $120, the investor can buy it for $100 and potentially sell it for $120, making a profit of $20 per share (minus the cost of the option, or the “premium”). 
  • However, if an options contract is “out of the money” at expiration, meaning it has no intrinsic value because exercising it would not be profitable, the contract simply expires worthless. In that case, the investor’s loss is limited to the premium originally paid for the contract. 

In buffered ETFs, selling a call option generates a premium, which helps fund the purchase of downside protection. The trade-off is that this approach limits investor gains if the market rises substantially, because the call option gives another party the right to buy the asset at the set price.