Call option

A call option gives the buyer the right, but not the obligation, to purchase 100 shares of an underlying stock at a specific price (the strike price) before or on the expiration date. The seller of the call takes on the obligation to deliver those shares if the buyer exercises.

You pay a premium to buy this right. The seller collects that premium in exchange for the obligation.

How a call option works

When you buy a call, you're making a bullish bet. You believe the stock will rise above your strike price before expiration. If it does, your call gains value. If it doesn't, your call expires worthless and you lose the premium paid, nothing more.

When you sell a call, you collect premium upfront and profit if the stock stays below your strike at expiration. The risk is that if the stock rises sharply, your losses can be significant (or unlimited on a naked call).

Profit and loss at expiry

• Call buyer profits when: stock price > strike price + premium paid
• Call buyer's max loss: premium paid (known upfront)
• Call seller profits when: stock price < strike price + premium collected
• Call seller's max loss: theoretically unlimited on a naked call; capped if the call is part of a spread

Real example

AAPL is trading at $185. You buy the $190 call expiring in 30 days for $3.00 per share ($300 per contract).

• Your breakeven: $190 + $3.00 = $193.00
• If AAPL rises to $200 at expiry: profit = ($200 − $190 − $3.00) × 100 = $700
• If AAPL stays below $190 at expiry: call expires worthless, loss = $300

When to buy calls

• You're bullish on a stock and want leveraged upside exposure
• You want to limit downside to just the premium paid
• You expect the stock to make a significant move before expiration

When to sell calls

• You own the stock and want to generate income (covered call)
• You believe the stock won't rise above a certain level
• IV is elevated and you want to collect inflated premium

Call options and implied volatility

The price of a call is heavily influenced by implied volatility. When IV is high, calls are more expensive. When IV is low, calls are cheaper. This is why buying calls in a low-IV environment and selling them in a high-IV environment is generally more favorable.

Related terms: Put option, strike price, premium, covered call, delta, expiration date