A call is the right to buy a stock at a set price by a certain date

A call option is a contract that gives you the right — but not the obligation — to buy 100 shares of a specific stock at a fixed price before a important date. That fixed price is called the strike price. The important date is called the expiration date. You pay money upfront to own the call, and that cost is called the premium.

The person who sells you the call is betting the stock price will stay below the strike price. If the stock price rises above the strike price before expiration, you can exercise the call — meaning you buy the 100 shares at the strike price, which is now cheaper than the market price. If the stock price never rises above the strike price, you let the call expire worthless and lose only the premium you paid.

Calls are traded on options exchanges like the Chicago Board Options Exchange (CBOE). You do not need to own the stock first to buy a call. You can buy a call on any stock that has options available, through a brokerage account that permits options trading.

Key Takeaways

  • A call gives you the right to buy 100 shares of a stock at a fixed strike price before the expiration date.
  • You pay a premium upfront to buy a call, and that is the maximum amount you can lose on that trade.
  • If the stock price rises above the strike price, you can buy the shares at the lower strike price and sell them at the higher market price, or hold them.
  • If the stock price stays below the strike price, the call expires worthless and you lose the premium you paid.
  • Calls are used by some traders to bet on a stock price rising, and by some stock owners to generate income by selling calls against shares they hold.

How the strike price and expiration date determine a call's value

The strike price is the price at which you can buy the stock if you exercise the call. It is set when the call is first created and does not change. If you buy a call with a strike price of $50 on a stock currently trading at $48, the call has no when ready value — the stock would have to rise above $50 just for you to break even after paying the premium.

The expiration date is typically one month, two months, three months, or longer out. Calls that expire sooner are cheaper because there is less time for the stock to move. Calls that expire further out are more expensive because there is more time for the stock to rise above the strike price. On the expiration date, the call ceases to exist. If you have not exercised it by then, you cannot exercise it at all.

The premium — the price you pay to buy the call — depends on how far the stock price is from the strike price, how much time is left until expiration, and how volatile the stock is. A call on a stock trading at $60 with a $50 strike price costs more than a call on the same stock with a $70 strike price, because the first one is more likely to be profitable.

What happens when you exercise a call

When you exercise a call, you are instructing your broker to buy 100 shares of the stock at the strike price. Your broker then deducts the strike price times 100 from your account and deposits the 100 shares into your account. You now own the stock outright and can hold it, sell it, or trade it like any other shares you own.

Most call buyers do not actually exercise and take ownership of the stock. Instead, they sell the call before expiration to another trader. If the stock has risen above the strike price, the call is now worth more than you paid for it, and you pocket the difference. This is how most call traders make money — by selling the call at a profit rather than exercising it.

You can also let a call expire without exercising it. This happens automatically on the expiration date if the stock price is below the strike price. The call becomes worthless, and you lose the entire premium you paid.

The difference between buying a call and selling a call

When you buy a call, you are betting the stock price will rise. Your maximum loss is the premium you paid. Your profit is unlimited — if the stock rises to $100, $200, or higher, your call becomes more valuable and you can sell it for a larger profit. You do not need to own the stock first.

When you sell a call, you are betting the stock price will stay flat or fall. You receive the premium upfront as income. Your maximum profit is the premium you keep. Your loss can be large — if the stock rises sharply, you may be forced to buy the stock at market price and sell it to the call buyer at the lower strike price, locking in a loss. Many stock owners sell calls against shares they already own to generate extra income, because the shares protect them if the stock price falls.

Selling calls is riskier than buying calls and requires approval from your broker. Most brokerages require you to have experience with options or a minimum account balance before you can sell calls.

Why traders use calls instead of buying stock directly

Buying a call costs far less than buying 100 shares of stock outright. If a stock trades at $50 per share, buying 100 shares costs $5,000. A call with a $50 strike price might cost $200 to $400. This means you can control the same 100 shares with a much smaller amount of money, which is called leverage.

Leverage cuts both ways. If the stock rises to $60, your $300 call might be worth $1,000 — a 233% gain on your $300 investment. But if the stock falls to $40, your call expires worthless and you lose the entire $300. With 100 shares, you would have lost $1,000, but you would still own the shares and could hold them hoping for a recovery.

Traders also use calls to bet on a stock rising without committing the large amount of capital that buying shares requires. A call is also a way to limit your downside risk to a known amount — the premium — while keeping your upside unlimited.

How call prices change before expiration

A call's price changes every trading day based on the stock price, the time remaining until expiration, and changes in how volatile the stock is. If the stock price rises, the call becomes more valuable and its price goes up. If the stock price falls, the call becomes less valuable and its price goes down.

As the expiration date approaches, a call loses value if the stock price has not risen above the strike price. This decay is called time decay. On the final day before expiration, a call with a strike price above the current stock price is worth almost nothing, because there is almost no time left for the stock to rise.

If the stock becomes more volatile — meaning its price swings up and down more sharply — calls become more valuable because there is a greater chance the stock will rise above the strike price. If the stock becomes less volatile, calls become less valuable.

Calls versus other ways to bet on a stock rising

You can bet on a stock rising by buying the stock itself, buying a call, or buying a call spread (buying one call and selling another at a higher strike price to reduce your cost). Each approach has different costs, risks, and profit potential.

Buying stock directly means you own the shares and can hold them forever. You pay the full stock price upfront. Your loss is limited to what you paid, but your profit is unlimited. You also receive any dividends the company pays.

Buying a call costs less upfront and gives you leverage, but the call expires and becomes worthless if the stock does not rise enough. You do not receive dividends. A call spread reduces your upfront cost further but also caps your maximum profit.

Frequently Asked Questions

What does it mean if a call is "in the money" or "out of the money"?

A call is in the money if the stock price is above the strike price — meaning you could exercise it right now and make a profit. A call is out of the money if the stock price is below the strike price — meaning exercising it would lose money. A call is at the money if the stock price equals the strike price.

Can I sell a call I bought before expiration?

Yes. You can sell any call you own to another trader at any time before expiration, as long as there is a buyer. Most call traders sell their calls before expiration rather than exercising them. Your broker's options trading platform will show you the current bid and ask prices for any call you own.

What happens if I buy a call and the stock gets delisted or the company goes bankrupt?

If the company goes bankrupt or is delisted, the call typically becomes worthless and expires. You lose the premium you paid. The call does not give you any claim on the company's assets — it is only the right to buy shares at the strike price, and those shares no longer have value.

Do I need a lot of money to buy a call?

No. A single call contract costs much less than buying 100 shares. Calls can cost anywhere from a few dollars to several hundred dollars depending on the stock price, strike price, and time to expiration. You need enough cash in your brokerage account to cover the premium, but not the full cost of buying the shares.

What is the difference between American and European calls?

An American call can be exercised at any time before expiration. A European call can only be exercised on the expiration date itself. Most calls traded in the United States are American calls. The difference matters mainly to professional traders; most individual traders sell their calls before expiration rather than exercising them.