What is a call option?
In one line: A call option is a contract that gives the buyer the right, but not the duty, to buy 100 shares at a set price before a set date.
A simple example
A stock trades at $50. You buy one call with a Strike price of $55 that expires in 2 months. The price of the option, called the premium, is $2.00.
One stock option usually covers 100 shares. So it costs $2.00 × 100 = $200.
Now picture expiry day:
- Stock at $60: the right to buy at $55 is worth $5 a share, or $500. Minus your $200, that's $300 ahead.
- Stock at $57: worth $2 a share, or $200. That's your break-even ($55 strike + $2 premium).
- Stock at $54: no one wants to buy at $55 when $54 is cheaper. The option expires worthless. You lose the $200.
A math example, not a promise. Before expiry, the option's price also moves with time and how fast the stock is moving.
Why it matters
A call lets you take a view that a stock will rise with a smaller amount of money up front. For the buyer, the most you can lose is the premium you paid.
But that small cost cuts both ways. Small moves in the stock can mean big moves in the option, up or down. And time works against the buyer every day. Learn the basics in options trading basics.
A common mistake
Thinking "the stock went up, so my call made money." If the stock rises from $50 to $54 and stops there, a $55 call can still expire worthless. The stock has to rise past the strike plus the premium, and before the date.
Buying a call caps your loss at the premium. Selling one does not. A seller without the shares can face losses with no fixed limit.
Questions
What is the difference between a call and a put?
A call is the right to buy at the strike. A Put option is the right to sell at the strike. Calls gain when the stock rises, puts when it falls.
Do I have to buy the shares with a call option?
No. It's a right, not a duty. Most buyers sell the option before expiry instead of using it to buy shares.
Can you lose more than you paid for a call?
Not if you bought it. The most a call buyer can lose is the premium. Sellers of calls carry much bigger risk.
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