Table Of Content
What Is a Call Option and How Does It Work?
A call option is a financial contract that gives the buyer the right, but not the obligation, to buy a specific stock (or other asset) at a predetermined price, known as the strike price, within a set period.
Investors often buy call options when they believe a stock’s price will rise, allowing them to profit from the price movement without purchasing the stock outright.
Here’s how it works in practice:
Buying a call option allows you to control shares of a stock for a fraction of the cost. If the stock rises above the strike price, you can either exercise the option or sell it for a profit.
Selling (or writing) a call option obligates you to sell the stock at the strike price if the buyer chooses to exercise. This is often used to generate income (called a covered call) if you already own the stock.
Call options are typically sold in contracts of 100 shares, so small movements in price can lead to substantial gains—or losses.
If the stock stays below the strike price by expiration, the option expires worthless and the buyer loses the premium paid.
Call options can be part of both speculative strategies and risk management.
Examples of Using Call Options (Buy/Sell, Profit/Loss)
Let’s explore different scenarios where call options are used, showing both outcomes and decision-making steps.
These examples show how call options can boost gains or expose you to risk depending on strategy and timing:
Scenario | Strike Price | Stock Price at Expiry | Premium Paid/Received | Outcome | Net Result |
|---|---|---|---|---|---|
Buy Call – Profit | $100 | $115 | $2 | Option in-the-money | +$1,300 |
Buy Call – Loss | $100 | $95 | $2 | Option expires worthless | –$200 |
Sell Call – Profit | $110 | $105 | $1.50 | Option not exercised | +$150 |
Sell Call – Loss | $110 | $120 | $1.50 | Must sell at $110 | –$850 |
Call Options Main Strategies: Who Uses Them and Why
Call options are used by different types of investors and traders for a range of purposes—from speculation to income generation.
Speculators buy calls to profit from price increases. For instance, a trader expecting Tesla to rise from $200 to $250 might buy a $210 call, aiming for a high percentage return if the price spikes.
Long-term investors use calls as a cheaper alternative to owning shares. Someone bullish on Microsoft might buy LEAPS (long-term call options) instead of investing thousands to invest in the stock directly.
Covered call sellers generate extra income. A retiree holding 500 shares of Coca-Cola could sell calls at a strike price above the current market, collecting premiums without planning to sell unless the stock rises sharply.
Hedge funds use calls as part of complex strategies. For example, they may buy calls on a stock they believe is undervalued while shorting another in the same sector.
These strategies reflect how call options allow investors to manage risk, gain leverage, or earn passive income depending on their goals.
Feature | Buying a Call Option | Selling a Call Option |
|---|---|---|
Risk | Limited to premium paid | Unlimited (if uncovered) |
Reward Potential | Unlimited (if stock rises) | Limited to premium received |
Strategy Type | Bullish | Neutral to mildly bearish |
Requires Stock Ownership | No | Yes (for covered calls) |
Call Options – Why They Are Risky?
While call options can offer large returns, they also carry significant risks that can lead to total losses or unexpected obligations.
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Options Can Expire Worthless, Causing a Total Loss
For example, if you purchase a call on Apple with a $180 strike price and the stock remains below $180 at expiration, the option has no intrinsic value.
As a result, you forfeit the entire premium—potentially $300 or more per contract—with nothing to show for it.
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Time Decay Steadily Erodes Option Value
This phenomenon, known as theta decay, works against buyers.
For instance, a call option might lose $50 in value each week as it nears expiration if the underlying stock remains flat.
Even if the stock moves slightly in your favor, the loss from time decay could still result in a net loss.
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Selling Calls Exposes You to Unlimited Risk
Suppose you sell a $100 call on Nvidia without owning the shares, and the stock skyrockets to $130.
You would have to purchase the stock at $130 and sell it at $100, incurring a $3,000 loss per contract (100 shares)—far more than the premium you received.
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Implied Volatility Can Inflate Premiums Deceptively
Traders often buy calls expecting big moves, but if implied volatility drops after purchase—even if the stock rises—the option's value may fall.
A small gain in stock price may not be enough to counter a sudden drop in volatility, leading to disappointing results.
How to Buy and Sell Call Options on a Brokerage Platform
Trading call options online is relatively simple, but it's important to understand the process and choose your strategy carefully before executing trades.
Open and fund a brokerage account with options approval. Platforms like Fidelity or Robinhood require you to apply for options trading and choose an approval level based on your experience.
Research a stock and choose your strike price and expiration. For example, if you believe Amazon will rise from $150 to $170, you might buy a $160 call expiring in one month.
Use the options chain to place an order. Click “Trade” or “Buy to Open” on the call option contract you want. Enter the number of contracts (usually 100 shares each) and set a limit or market order.
Monitor the trade and decide when to exit. You can sell the call before expiration to lock in gains or losses, or you can exercise it if it’s in the money.
To sell a call (write a call), choose ‘Sell. ‘ Validate it's the same strike price and date. Make sure you see the number of calls you currently have in the position (For example, if you buy one call you should see “1′ in your positions).
FAQ
Traders buy calls when they expect a stock’s price to rise. It allows leveraged exposure to upside potential with limited initial investment.
Selling a call means you're agreeing to sell stock at a set price if the buyer exercises. This is often done to collect income through premiums.
Yes, if the stock stays below the strike price by expiration, your option expires worthless and you lose the premium you paid.
A covered call involves selling a call option on stock you already own. It’s a strategy used to earn extra income in flat or mildly bullish markets.
A naked call is when you sell a call option without owning the underlying stock. This is risky, as your potential loss is unlimited if the stock rises sharply.
You profit when the stock rises above the strike price plus the premium paid. You can either sell the option at a higher price or exercise it.
If it’s in the money, you can exercise the option or let it auto-exercise. If it’s out of the money, it expires worthless.
Call options offer higher potential returns with lower upfront cost, but they expire and can lose value quickly. Stocks offer ownership and longer-term security.
It’s the strike price plus the premium paid. The stock must rise above this point for the trade to be profitable.
Yes, most traders close positions early to lock in gains or cut losses. You can sell your call option anytime before the expiration date.
