📞 Call options: buying and selling the right to buy

🎯 In 30 seconds: A call gives its buyer the right to buy 100 shares at the strike price until expiration. The buyer pays a premium and profits at expiration only if the stock ends above strike + premium. The most the buyer can lose is the premium. The seller of a call collects the premium and must sell 100 shares at the strike if assigned. A seller who does not own the shares has no limit on the loss. This chapter works every case in dollars.

What a call is, in one line

A call option is a contract that gives you the right, but not the obligation, to buy 100 shares of a stock at a fixed price (the strike) until a fixed date (the expiration). You pay a price for that right, called the premium. If these words are new, read What an option is first.

Buying a call is called being long a call. Selling one you did not already own is called writing it, or being short a call.

Throughout this chapter we use one hypothetical setup. Company X trades at $50. A $50 call that expires in about 60 days costs $2.60 per share. One contract covers 100 shares, so it costs $2.60 x 100 = $260.

Buying a call: the three numbers that matter

Before any call purchase, work out three numbers. All three are measured at expiration.

The profit or loss at expiration for one long call is:

P/L = (max(stock price - strike, 0) - premium) x 100

The part max(stock price - strike, 0) is the call's value at expiration. If the stock is below the strike, the right to buy at $50 is worth nothing, because you could buy cheaper in the market.

Worked example: one call at five prices

Hypothetical. You buy one Company X $50 call for $2.60 and hold it to expiration.

Look at the $51 row. The call ended "in the money", worth $1.00, and you still lost $160. Being in the money at expiration is not the same as making money. You need the stock above the breakeven.

You do not have to hold to expiration

Most option buyers never exercise. They sell the call back in the market before it expires. The price they get includes the value left from the remaining time, which is called time value or extrinsic value.

Hypothetical. Thirty days after you bought, Company X is at $53. With 30 days left, a pricing model gives that call a value of about $3.78. If you sell at $3.78:

If the stock were still at $53 on expiration day, the call would be worth only $3.00, its intrinsic value. Selling earlier captured $0.78 of time value that would otherwise have melted away. How that melting works is the subject of What an option is worth.

Choosing a strike: in, at or out of the money

A call is in the money (ITM) when the stock is above the strike, at the money (ATM) when it is about equal, and out of the money (OTM) when the stock is below the strike.

Hypothetical prices, stock at $50, 60 days to expiration, all from the same pricing model so they are consistent with each other:

The pattern is the trade-off you face every time:

• ITM calls cost more, move more like the stock, and need less of a move to profit. They lose less in percentage terms when you are a little wrong.
• ATM calls sit in the middle and carry the most time value.
• OTM calls are cheap in dollars but need a big move just to break even. In this example, a 12% rise to $56 earned only 18% on the $55 call, while a smaller move left it worthless.

Cheap does not mean low risk. A cheap OTM call is the option most likely to go to zero. The Greeks show how to estimate those odds with delta.

A call compared with buying the shares

Same view, two tools. Buying 100 shares at $50 costs $5,000. Buying one $50 call costs $260. Here is how they compare at expiration:

• Upside: above $50, both gain $100 per $1 rise, but the shares are always $260 ahead because you did not pay a premium for them.
• Downside: the call can never lose more than $260. The shares can lose up to $5,000 if Company X goes to zero.
• Time: shares do not expire. If Company X goes nowhere for 60 days and rises later, the shareholder benefits and the call buyer has already lost.
• Dividends and votes: shareholders receive dividends and can vote. Call holders get neither.

The fair comparison is not "$260 versus $5,000". It is "what am I paying for the limited downside, and how long do I need to be right?"

Selling (writing) a call

When you sell a call, you collect the premium today and accept an obligation: if the buyer exercises, you must sell 100 shares at the strike. Your numbers are the buyer's numbers flipped over.

There are two very different ways to sell a call.

Covered call. You already own 100 shares. If assigned, you deliver the shares you have. Your risk is mostly the risk of owning the stock, and selling the call caps your upside at the strike. This is a common income strategy, covered in Covered calls.

Uncovered (naked) call. You do not own the shares. If Company X jumps to $70 on a takeover offer, you must deliver 100 shares at $50 that cost $70 to buy.

At $100 the loss would be $4,740. There is no price at which the loss stops growing. That is why brokers reserve uncovered calls for their highest options approval level and require margin. See Getting approved and Margin.

Costs and evidence

Every option trade pays the bid-ask spread and usually a per-contract fee. On a $0.85 option with a $0.10 spread, the spread alone is more than 10% of the price. Check the costs in What trading really costs and how spreads look in Reading an options chain.

The research on retail call buyers is a warning. A 2025 Review of Finance study of retail option trading around earnings announcements estimated average retail losses of 5% to 9%, and 10% to 14% around the most volatile announcements. Buying calls is easy. Buying them at a good price, with a plan and a sensible size, is the hard part.

Try it

Pick a stock from your Watchlist and look up its options. Choose one ITM, one ATM and one OTM call with the same expiration. For each, write the cost per contract, the breakeven and the P/L at expiration if the stock ends 5% lower, flat, 5% higher and 15% higher. Build the same table as the strike comparison above. Then follow the real prices for two weeks and record what each call was worth, without trading. Notice how the OTM call behaves when the stock barely moves.

Sources

• Options Industry Council (OIC): Long call
• OIC: What is an option?
• FINRA: Options
• Stanford GSB: de Silva, So and Smith, Losing is Optional: Retail Option Trading and Expected Announcement Volatility