A call option gives the buyer the right — but not the obligation — to purchase 100 shares of stock at a fixed price (the strike price) at any time before the option expires. In exchange for this right, the buyer pays a premium to the option seller. Call options are used when you expect the underlying stock to rise above the strike price before expiration.
Call Option Profit and Loss
For the buyer (long call):
- Maximum loss: The premium paid. This occurs if the stock stays below the strike price and the option expires worthless.
- Breakeven: Strike price + Premium paid. The stock must exceed this price for the trade to profit.
- Maximum gain: Theoretically unlimited as the stock price rises above breakeven.
Example: Buy a $50 call for $3 premium ($300 total). Breakeven = $53. If stock reaches $65 at expiry: intrinsic value = $15 per share, profit = $15 − $3 = $12 per share ($1,200 total). If stock ends at $49: option expires worthless, loss = $300.
Intrinsic Value vs Time Value
An option's premium has two components:
- Intrinsic value: How far in-the-money the option is. A $50 call when the stock is at $55 has $5 of intrinsic value.
- Time value: The remaining premium above intrinsic value. Reflects time remaining until expiry and implied volatility. Time value erodes to zero at expiration (theta decay).
An out-of-the-money call (stock below strike) has zero intrinsic value and is entirely time value. It can still be profitable if the stock rises above the strike before expiry, but time is always working against the buyer.
When to Use Call Options
Calls offer leveraged upside exposure with defined maximum loss — the premium paid. They're useful when you expect a significant move but want to cap the downside. However, you must be right about direction and timing: even a correctly directional move can result in a loss if the move happens after expiration or is not large enough to exceed the premium paid.