Call Option
Definition
A contract giving the holder the right, but not the obligation, to buy a specific asset at a predetermined price (strike price) before or on the expiration date.
A call option gives you the right to buy a stock at a specific price within a specific timeframe. If you buy a $110 call option on a stock trading at $100, you profit if the stock rises above $110 plus the premium you paid. Your maximum loss is limited to the premium.
Call options provide leveraged upside exposure. Controlling 100 shares of a $100 stock normally costs $10,000. A call option might cost $300 for the same upside potential. If the stock rises 20% to $120, the option might increase from $3 to $10 — a 233% return versus 20% from owning shares. However, if the stock doesn't rise enough before expiration, you lose the entire $300 premium.
Time decay (theta) works against call buyers. Each day that passes, the option loses some of its time value — the possibility that the stock could move before expiration. Options lose value faster as expiration approaches, which is why buying short-dated options is very risky despite their lower cost.
Long-term call options (LEAPS — Long-term Equity Anticipation Securities) expiring 1-2 years out provide leveraged exposure with more time for the thesis to play out. They have less time decay per day and can be used as a capital-efficient substitute for stock ownership, though they still expire and don't pay dividends.
Call selling (writing calls) generates income. Covered calls (selling calls on stock you own) are conservative. Naked calls (selling calls without owning the stock) carry theoretically unlimited risk and are only appropriate for experienced traders with proper risk management.
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Frequently Asked Questions
Are call options a good investment?
Call options are a tool, not an investment. They provide leveraged exposure — amplifying gains and losses. Most options expire worthless. They're appropriate for specific strategies (hedging, income, leverage) with clear risk parameters. Buying out-of-the-money calls hoping for quick gains is closer to gambling.
What happens if my call option expires in the money?
If your call expires with the stock price above your strike, it's automatically exercised — you buy 100 shares at the strike price. If you don't have the funds, your broker will typically sell the option before expiration. You can also sell the option yourself anytime before expiration to capture its value.