Definition
A call option lets you control 100 shares of stock at the strike price without buying the shares outright. You pay a premium upfront; if the stock rises above (strike + premium), the call is profitable. If not, you lose the premium but no more. Calls provide leveraged upside exposure — a 10% stock move might produce a 100% option gain. The tradeoff: options expire worthless if the stock doesn't move enough by expiration. Key concepts: intrinsic value (how much the stock exceeds strike), time value (premium above intrinsic, decays daily), implied volatility (market's forecast of future moves). Selling calls (writing) collects premium but caps upside and — if uncovered — creates unlimited risk.
Example
Stock XYZ trades at $50. You buy 1 call with strike $55 expiring in 60 days for $2 premium ($200 total, controlling 100 shares). If XYZ rises to $65 by expiration: intrinsic value = $10, so call is worth $1,000 — a 400% return on the $200 premium. If XYZ stays below $55, the call expires worthless and you lose $200.
Frequently Asked Questions
Why buy a call instead of the stock directly?
Calls provide leveraged upside for less capital. $200 controls $5,000 worth of stock. But they can lose 100% of premium if the stock doesn't move enough — stocks can only fall to zero, calls can expire worthless immediately.
What is 'in the money' vs 'out of the money'?
In the money (ITM): stock price above strike (call has intrinsic value). Out of the money (OTM): stock below strike (only time value). At the money (ATM): stock ≈ strike.
What is time decay (theta)?
Options lose value each day as expiration approaches, all else equal. Time decay accelerates in the final 30-45 days. Buyers of options fight time decay; sellers of options benefit from it.