A call option gives you the right to buy a stock at a set price by a certain date, but not the obligation to do it

When you buy a call option, you are paying for the right to purchase 100 shares of a stock at a strike price — a price locked in when you buy the option. You can exercise that right anytime before the option expires. If the stock price rises above your strike price, you can buy at the lower locked-in price and sell at the market price, pocketing the difference. If the stock price falls or stays flat, you can let the option expire worthless and lose only the money you paid upfront for the option itself.

The price you pay to buy a call option is called the premium. This is not the price of the stock — it is a separate fee for the right to buy. Premiums are quoted per share but represent the cost for one contract, which controls 100 shares. So if a premium is listed as $2, you pay $200 to control 100 shares of that stock.

Call options are used by traders in two main ways: to bet that a stock price will rise, or to reduce the cost of buying stock you already own. The mechanics are the same, but the reason for using them differs based on what you are trying to do with your money.

Key Takeaways

  • A call option contract gives you the right to buy 100 shares at a fixed strike price before the expiration date, and you lose only your premium if you do not use it.
  • The premium is what you pay upfront for the option itself, separate from the stock price, and is quoted per share but costs 100 times that amount per contract.
  • Call options expire on a specific date — usually the third Friday of the month — and become worthless if the stock price never rises above the strike price.
  • Traders use calls to profit from stock price increases without buying the full stock, or to lower the cost of stock ownership through covered call strategies.
  • The maximum loss on a call you buy is the premium you paid; the maximum gain is theoretically unlimited as the stock price rises.

Strike price, expiration date, and premium: the three numbers that define a call

Every call option has three numbers that determine its value and how it behaves. The strike price is the price at which you can buy the stock if you exercise the option. The expiration date is the last day you can exercise it — options expire on the third Friday of each month for standard monthly options, though some brokers offer weekly expirations. The premium is the price you pay to own the option.

These three numbers move together. If a stock is trading at $50 and you buy a call with a $50 strike price expiring in one month, the premium might be $3 per share ($300 per contract). If you buy the same strike but with three months until expiration, the premium might be $5 per share because you have more time for the stock to move in your favor. If you buy a call with a $55 strike price instead, the premium might be $1 per share because the stock has to rise further for the option to be worth exercising.

As the stock price moves and time passes, the premium changes. If the stock rises to $55, that $50 strike call might be worth $6 per share because you could buy at $50 and sell at $55. If the stock falls to $45, that same call might be worth only $0.50 because the right to buy at $50 is nearly worthless. On the expiration date, the premium equals either the difference between the stock price and strike price, or zero — whichever is higher.

In-the-money, at-the-money, and out-of-the-money calls explained

Traders use three terms to describe where a call option stands relative to the current stock price. An in-the-money call has a strike price below the current stock price — the right to buy is worth exercising right now. An at-the-money call has a strike price equal to or very close to the current stock price. An out-of-the-money call has a strike price above the current stock price — exercising it would cost more than buying the stock on the open market, so it is worthless unless the stock price rises.

In-the-money calls cost more in premium because they have when ready value. Out-of-the-money calls cost less in premium because they only become valuable if the stock rises. At-the-money calls sit in the middle. A trader betting on a big price move might buy out-of-the-money calls because the premium is cheap, but the stock has to move a lot for the trade to work. A trader wanting a safer bet might buy in-the-money calls, which cost more but have a better chance of being worth something at expiration.

How traders use calls to profit from rising stock prices

The simplest use of a call option is to bet that a stock price will rise. Instead of buying 100 shares at $50 per share ($5,000), you buy one call option with a $50 strike for $3 per share ($300). If the stock rises to $60, your call is now worth at least $10 per share ($1,000), and you can sell it for a profit of $700 on a $300 investment. If the stock falls to $40, your call expires worthless and you lose the $300 premium — but you never had to put up $5,000 in the first place.

This is called leverage: you control the same 100 shares with less money upfront, so your percentage gain or loss is larger. A $10 rise in the stock is a 20 percent gain if you own the stock ($1,000 profit on $5,000), but a 333 percent gain if you own the call ($700 profit on $200 net cost after the premium). The flip side is that your loss is also magnified in percentage terms — if the stock falls $10, you lose 100 percent of your $300 premium instead of 20 percent of your $5,000 stock purchase.

Covered calls: selling calls against stock you already own

A covered call is when you own 100 shares of a stock and sell a call option against it. You collect the premium from someone who buys that call, lowering your cost basis on the stock. If the stock price stays below the strike price, the call expires worthless, you keep the premium, and you still own the stock. If the stock price rises above the strike price, the buyer of the call exercises it, and you are forced to sell your 100 shares at the strike price — which is higher than what you paid, so you still make money overall.

Traders use covered calls to generate income from stock they plan to hold anyway. If you own 100 shares of a $50 stock and sell a $55 call for $2 per share, you collect $200 in premium. If the stock stays below $55, you keep the $200 and the stock. If the stock rises to $60, your shares are called away at $55, and you make $500 on the stock plus $200 from the premium — a total of $700 profit. You miss out on the $5 gain above $55, but you were paid $200 to accept that limit.

What happens when a call option expires

Call options expire on a set date, usually the third Friday of the month at 4 p.m. Eastern time. On that date, if the stock price is above the strike price, the option is in-the-money and has real value. If you own the call, you can exercise it and buy the stock, or sell the option itself to someone else. If you do nothing, most brokers will automatically exercise the call for you, meaning you will buy 100 shares at the strike price.

If the stock price is below the strike price at expiration, the option is out-of-the-money and worthless. It expires and disappears. You lose the premium you paid, and that is the end of it. You do not owe anything; you straightforward do not exercise the right to buy.

You do not have to hold a call until expiration. You can sell it anytime during market hours before the expiration date. Many traders close out their positions days or weeks before expiration to lock in a profit or cut a loss, rather than waiting to see what happens on the final day.

The risk and reward of buying versus selling calls

When you buy a call, your maximum loss is the premium you paid. Your maximum gain is theoretically unlimited because a stock price can rise indefinitely. The break-even point is the strike price plus the premium — so if you buy a $50 call for $3, the stock has to rise to $53 for you to break even.

When you sell a call, the math flips. Your maximum gain is the premium you collect. Your maximum loss is theoretically unlimited if you do not own the stock (a naked call), because the stock price could rise far above the strike price and you would have to buy it at market price to deliver it. If you own the stock (a covered call), your loss is limited because the stock can only fall to zero, and you already own it.

Most brokers restrict naked call selling to experienced traders because of the unlimited loss potential. Covered calls are available to most account types because the risk is capped by the stock you already own.

Frequently Asked Questions

What is the difference between a call option and a stock?

A call option gives you the right to buy a stock at a set price, while owning a stock means you own a piece of the company. Calls cost less upfront but expire on a specific date and become worthless if the stock does not rise. Stocks do not expire and you can hold them indefinitely. Calls give you leverage — bigger percentage gains and losses on less money — while stocks give you ownership and voting rights.

Can I lose more money than I paid for a call option?

If you buy a call, no — your loss is capped at the premium you paid. If you sell a call without owning the stock (a naked call), yes — your loss is theoretically unlimited because the stock price could rise far above the strike price. Most brokers do not allow naked calls for new traders.

What does it mean if a call option is in-the-money?

In-the-money means the stock price is above the strike price, so the right to buy is worth exercising. An in-the-money call has real value and will cost more in premium than an out-of-the-money call. At expiration, an in-the-money call is worth at least the difference between the stock price and the strike price.

How do I know when to sell a call option I bought?

You can sell a call anytime during market hours before expiration. Many traders sell when the premium doubles or when the stock reaches a target price, rather than waiting until expiration. You can also hold until expiration and exercise the call to buy the stock, or let it expire worthless if the stock price falls below the strike price.

What happens if I own a call and the stock drops below the strike price?

The call becomes out-of-the-money and loses value. You can sell it for whatever premium remains, or hold it and let it expire worthless on the expiration date. You lose the premium you paid, but that is your maximum loss — you do not owe anything beyond that.