What Is a Call Option?
A call option is a derivative contract that gives its holder the right, but not the obligation, to buy an underlying asset, such as a stock, at a specified strike price on or before an expiration date. The buyer pays a premium to the seller, or writer, of the call for this right.
Calls are fundamentally a bullish instrument: their value rises as the underlying price climbs above the strike. If the underlying never exceeds the strike, the call expires worthless and the buyer loses only the premium.
How It Works
A call is in the money when the underlying trades above the strike, at the money when they are equal, and out of the money when the underlying is below the strike. At expiration, a call is worth the greater of zero or the underlying price minus the strike.
Sellers of calls take the opposite side: they keep the premium if the option expires worthless but face losses if the stock rallies. Selling calls against stock you already own, known as covered call writing, is a popular income strategy; selling them without owning the stock, called naked call writing, carries theoretically unlimited risk.
Example
Suppose a stock trades at $80 and you buy a call with a $85 strike for a $2 premium. Your breakeven is 85 + 2 = $87. If the stock finishes at $95, the call is worth $10, giving you an $8 profit per share, a 400% return on the $2 premium while the stock gained about 19%.
If the stock ends at $84, even though it rose, the call expires worthless because it is below the strike, and you lose the full $2 premium.
Why It Matters
Calls illustrate the defining feature of options: asymmetric payoffs, with limited downside for buyers and magnified percentage gains when the view is right. Companies also grant call-like instruments to employees as stock options, and convertible bonds embed a call on the issuer's shares.
In markets roles, understanding call payoff diagrams and breakevens is a staple of trading interviews and day-to-day risk management on derivatives desks.
