Options & Derivatives
Call Option
Reviewed
How does a call option work?
A call gives its buyer the right to buy an underlying asset at the strike price during the contract's permitted exercise period. The buyer pays a premium for that right. The seller receives the premium and accepts an obligation to sell if assigned. Standard U.S. equity-option contracts generally represent 100 shares, but investors should verify each contract's specifications.
Call option example
Suppose a stock trades at $50 and a call has a $55 strike price. At expiration, the call's intrinsic value depends on where the stock finishes.
| Stock at expiration | $55-strike call |
|---|---|
| $45 | Expires out of the money |
| $55 | At the money |
| $65 | $10 per share intrinsic value |
The buyer's break-even at expiration is the strike price plus the premium paid, before fees. A $3 premium on the $55 call produces a $58 break-even. The contract can still have market value before expiration even when the stock is below that level.
Buying versus selling a call
A call buyer generally risks the premium paid and benefits from upside. A naked call seller can face theoretically unlimited loss because a stock price has no fixed ceiling. A covered-call seller owns the underlying shares, which changes the risk but also caps upside above the strike. The SEC's options investor bulletin explains these rights, obligations, and risks.
What changes a call option's price?
Call values are influenced by the underlying price, strike price, time remaining, implied volatility, interest rates, and expected distributions. A bullish view can still lose money if the move is too small, arrives too late, or was already reflected in an expensive premium.
Example
If you buy a call with a $50 strike and the stock rises to $60, you can buy at $50 and capture the difference.
Related terms
Call Option — FAQ
What is Call Option?
A call option is a contract giving the buyer the right, but not the obligation, to buy an asset at a set price before a specified expiration date.
Can you give an example of Call Option?
If you buy a call with a $50 strike and the stock rises to $60, you can buy at $50 and capture the difference.
What happens when you buy a call option?
You pay a premium for the right to buy the underlying asset at the strike price during the contract's permitted exercise period. You are not required to exercise.
What is the maximum loss when buying a call?
For a straightforward long call, the maximum loss is generally the premium paid plus transaction costs if the option expires worthless.
What is a call option's break-even price?
At expiration, the usual break-even is the strike price plus the premium paid, before fees. Before expiration, time value and volatility also affect the contract price.
What is the difference between a call and a put?
A call gives its buyer the right to buy the underlying asset at the strike price. A put gives its buyer the right to sell it at the strike price.
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