A contingent equity instrument that gives the holder the right to purchase shares of the company’s stock for a preset exercise price. Upon exercise, the holder receives shares of common stock in exchange for cash. The holders will exercise their rights only when the market price of common share exceeds the exercise price. The positive difference between the two prices constitutes a potential capital gain for the holder.

In a different context, call options may also be embedded in callable bonds so that the issuer has the right to redeem the bonds if appropriate. The value of this call option is the difference between the value of an option-free bond and the value of a bond with a callability feature.