Call option.
In plain English
A call option is one of the two main building blocks of options trading. The buyer pays a premium upfront and gains the right (not the obligation) to buy 100 shares at the strike price any time before expiration. If the stock rises above the strike, the call gains value. If the stock stays below the strike at expiration, the call expires worthless and the buyer loses the premium. Each standard listed contract represents 100 shares.
01Why it matters
Calls are used three ways: to amplify a directional bet (small premium, large upside potential), for income (selling covered calls against owned stock), and occasionally for hedging. They are not a substitute for owning the underlying stock long-term, because their value decays as expiration approaches.
02The math, step by step
The stock trades at $100. You buy a $105 call for $2 (one contract costs $200). If the stock rises to $115 by expiration, intrinsic value is $10 per share and the contract is worth $1,000. Net gain on a $200 outlay: $800. If the stock stays at $100 or below at expiration, the call expires worthless and you lose the $200.
03What this is NOT
A call option is not the same as owning the stock. It gives you the right to BUY at a fixed price for a limited time. Below the strike at expiration the call is worth $0, while the stock itself still has value.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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