A call option is a contract that gives you the right to buy a specific stock at a fixed price by a certain date
When you buy a call option, you are paying for the right — not the obligation — to purchase 100 shares of a stock at a price you lock in today. That locked-in price is called the strike price. The date by which you must decide is called the expiration date. You pay a fee upfront, called the premium, just to hold that right.
Here is a concrete example: You buy a call option on Apple stock with a strike price of $150 and an expiration date three months away. You pay $5 per share, or $500 total (since one contract covers 100 shares). If Apple stock rises to $180 before expiration, you can buy 100 shares at $150 each — a $30-per-share gain — and immediately sell them at market price. If Apple stays at $140 or drops, you simply let the contract expire and lose only the $500 premium you paid.
The person who sold you that call option — the seller or writer — is betting the stock will not rise above the strike price. If it does, they must sell you the shares at the lower price, which costs them money.
Key Takeaways
- A call option costs money upfront (the premium) and gives you the right to buy 100 shares at a fixed strike price before the expiration date.
- You make money if the stock price rises above the strike price plus the premium you paid; you lose money only up to the premium if the stock falls or stays flat.
- One call contract always represents 100 shares, so a $5 premium means $500 out of pocket.
- You never have to exercise the option — if it is not profitable, you simply let it expire and walk away.
How the money works when you exercise a call
Exercising a call means using your right to buy the stock at the strike price. You pay the strike price times 100 shares to the seller, and you receive 100 shares in your brokerage account.
Say you bought a call with a $150 strike price and Apple is now trading at $180. You exercise the option: you pay $15,000 ($150 × 100) and receive 100 shares worth $18,000 at current market price. Your profit is $3,000 minus the premium you paid upfront. If you paid $500 for the option, your net gain is $2,500.
Most traders never actually take delivery of the shares. Instead, they sell the call option itself before expiration — if the stock has risen, the option is now worth more than they paid for it, and they pocket the difference. This is faster and requires less capital than exercising and then selling the shares separately.
The relationship between strike price and premium
The premium — the price you pay for the call — depends on how far the strike price is from the current stock price. A call with a strike price close to today's stock price costs more than one with a strike price far above it, because it has a higher chance of being profitable.
If Apple is trading at $150 today, a call with a $150 strike price (called at-the-money) might cost $5. A call with a $160 strike price (out-of-the-money) might cost only $2, because the stock has to rise $10 just to reach the strike price. A call with a $140 strike price (in-the-money) might cost $12, because it is already $10 in your favor.
The closer the expiration date, the cheaper the option usually becomes — unless the stock is moving sharply. An option expiring in one week is worth less than the same option expiring in three months, because there is less time for the stock to move in your favor.
What happens at expiration
On the expiration date, the call option stops existing. If the stock price is above the strike price, the option is in-the-money and you can exercise it. If the stock price is below the strike price, the option is out-of-the-money and you let it expire — your loss is limited to the premium you paid.
Most brokerages will automatically exercise an in-the-money call at expiration if you have enough cash or buying power in your account. If you do not want to own the stock, you must sell the option before expiration or contact your broker to prevent automatic exercise.
If the stock is exactly at the strike price at expiration, the option is worthless and expires. You lose the entire premium.
Call options versus buying stock outright
Buying a call option costs far less upfront than buying 100 shares of stock. If Apple is $150 per share, buying 100 shares costs $15,000. Buying a call option with a $150 strike price might cost $500. This lower cost means you can control the same number of shares with much less money — a concept called leverage.
The tradeoff is that your call option expires. If you buy stock, you own it indefinitely and can hold it as long as you want. If you buy a call, you must act before expiration or lose the right to buy at that price. Also, if the stock does not move, you lose money on the call (the premium) while a stock owner simply breaks even.
Call options are also riskier in percentage terms. If you pay $500 for a call and it expires worthless, you have lost 100% of that money. If you buy $15,000 of stock and it drops 10%, you have lost $1,500 — a smaller percentage of your total investment.
Why traders use call options
Traders use calls for three main reasons: to bet that a stock will rise without putting up the full purchase price, to lock in a future buying price before a major announcement, or to generate income by selling calls to other traders.
A trader who expects Apple to rise from $150 to $170 in two months might buy a $155 call for $3 instead of buying 100 shares for $15,000. If Apple hits $170, the call is worth at least $15 (the difference between $170 and $155), so the trader has turned $300 into $1,500 — a 400% return. The same move in the stock itself would have been a 13% return on the $15,000 investment.
A company executive who expects a stock to rise after earnings might buy calls to lock in today's price, protecting against the risk that the stock jumps before they can buy. A seller of calls collects the premium upfront and keeps it if the stock does not rise past the strike price — a way to generate steady income from stock they already own or are willing to own.
Risks specific to call options
The main risk is that you lose the entire premium if the stock does not rise enough. A $500 call option can expire worthless, wiping out your entire investment in that trade. This is different from stock, where you can hold and wait for recovery.
Time decay is another risk. As expiration approaches, the option loses value even if the stock price does not move. An option worth $500 with two months to expiration might be worth only $200 with two weeks left, even if the stock is unchanged. This works against you if you are holding the option and the stock is not moving.
Volatility also affects option prices. If the stock becomes less volatile — meaning it swings less — the option becomes cheaper, even if the stock price stays the same. Traders who buy options are betting on big moves; if the stock settles down, the bet loses value.
Frequently Asked Questions
What is the difference between a call option and a put option?
A call gives you the right to buy stock at a fixed price. A put gives you the right to sell stock at a fixed price. Traders buy calls when they expect the stock to rise and buy puts when they expect it to fall. Both cost a premium upfront and expire on a set date.
Can I lose more than the premium I paid?
No. If you only buy call options (you do not sell them), your maximum loss is the premium you paid. If the stock crashes, the option expires worthless and you lose that money, but you have no other obligation. Selling calls carries different and larger risks.
How do I know what strike price to choose?
That depends on your outlook and risk tolerance. A lower strike price (closer to today's stock price) costs more but has a higher chance of profit. A higher strike price costs less but requires a bigger stock move to be profitable. There is no single right answer — it is a tradeoff between cost and probability.
Do I have to exercise my call option?
No. Exercising is optional — that is the whole point of an option. You can sell the option before expiration, let it expire worthless, or exercise it. Most traders sell the option itself rather than exercise it, because that requires less capital and happens faster.
What happens if the stock gaps up overnight?
Your call option becomes more valuable, because the stock is now further above the strike price. You can sell the option for a profit or exercise it. The option protects you by locking in the lower strike price — you benefit from the entire gap up, minus the premium you paid.