A call option gives the holder the right to do what?

A call option gives the holder the right to buy shares of stock at a specified price, known as the strike price, up until a predetermined expiration date. This financial instrument is typically used by investors who anticipate that the price of the underlying stock will rise above the strike price before the option expires. If they are correct, they can exercise their option to purchase the shares at a lower price than the market value, potentially leading to a profit.

The other choices do not accurately describe the function of a call option. For instance, selling shares at a predetermined price pertains to a put option, which gives the right to sell rather than buy. The mention of trading shares without costs is not characteristic of options as there are usually transaction fees involved. Finally, receiving dividends relates to stock ownership, and while an option holder can indirectly benefit from the dividends if they exercise their option and become a shareholder, they do not receive dividends simply by holding the option itself. Thus, the accurate definition of a call option focuses on the right to purchase shares, highlighting the investment strategy that capitalizes on future price increases.