A call option gives its buyer the right but not the obligation to buy an asset at an agreed price (the strike price) within a fixed timeframe. The asset might be a stock, commodity or bond, for example.
The person who writes the option is legally obliged to sell the underlying asset (for example shares, if the option is a stock option) to the option buyer.
Call options are profitable for the buyer when the underlying asset’s price rises to reach or exceed the strike price.
Buyers of call options can lose no more than the price they pay for the option. Their gains are potentially very high.
Call options are sold (written) by people who believe the price of the underlying asset is unlikely to rise.
The writer sells the call for a sum of money called the premium.
The call option is said to be covered if the writer of the option owns the stock on which he has sold the call option. He will never be forced to go into the market to buy shares at a higher price than he has to deliver them to the option holder for.
The call option is uncovered or naked when the option writer does not own the stock he sells options for. Potential losses for people who write naked call options can be very large.