Learn options · plain language
What is a call option
A call option is the right to buy a stock at a price you fix today, any time before a date you also fix today. You pay for that right up front.
If the stock ends up above your fixed price, the right is worth something, because you can buy below the going rate. If it ends up below, nobody wants the right to overpay, so it expires worth nothing and your payment is gone.
What you are actually buying
You are buying optionality on a price. The strike is the price you locked, the expiry is how long the lock lasts, and the premium is the rent you paid for it.
A call does not give you the stock. It gives you the ability to get the stock at the strike. Most traders never take delivery; they sell the contract itself before expiry.
What it is worth at expiry
At expiry a call is worth the stock price less the strike, when that number is positive, and zero otherwise. There is no time value left to pay for, so the arithmetic is exact.
That value is called intrinsic value. Before expiry a call usually trades above it, and the difference is what you are paying for the time still remaining.
Break-even is past the strike
The contract starts paying back at the strike, but you only start making money once it has covered the premium. A $50 call bought for 1.50 breaks even at $51.50.
This is why a stock can rise, your call can gain, and the trade can still lose. The gain has to clear what you paid first.
Selling a call is a different trade
If you sell a call you receive the premium and take on the duty to deliver shares at the strike. Against shares you own that is a covered call. Without the shares it is naked, and the loss has no ceiling because a stock has no ceiling.
The words sound similar. The risk is not similar.
A worked example
| Stock today | $48 |
|---|---|
| Contract | One $50 call, 1.50 premium |
| What it cost | $150 |
| Break-even | $51.50 |
| Stock at expiry: $55 | Worth $500, net +$350 |
| Stock at expiry: $51 | Worth $100, net -$50 |
| Stock at expiry: $49 | Worthless, net -$150 |
The second row is the one people do not expect. The stock rose, the option had value, and the trade still lost money because the rise did not cover the premium.
Run the numbers in the options profit calculator, free and with no sign-up.
Where this goes wrong
Buying far out of the money because it is cheap
A cheap call is cheap because the market thinks it is unlikely. Low cost per contract and low probability are the same fact priced two ways.
Holding to expiry out of hope
Time value drains fastest in the final weeks. A call that needs a big move in a few days is usually the worst version of the position you held.
Ignoring what happens on assignment
If you are short a call and it finishes in the money, you deliver shares. If you did not own them you are now short stock on Monday, which is a position you did not choose.
Common questions
What happens if I do nothing at expiry?
An in-the-money call is normally exercised automatically by your broker, which means buying 100 shares per contract. Out of the money, it expires and nothing happens except the premium is gone.
Can I sell the call before expiry?
Yes, and most traders do. You are selling the contract to someone else at whatever it is worth then, which includes any time value still left in it.
Why did my call lose value when the stock went up?
Usually implied volatility fell, or enough time passed to offset the move. The stock price is only one of the inputs.
Write the trade down before you forget why
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This is education, not advice, and nothing here predicts an outcome. Options carry risk of total loss on the premium paid and larger losses when sold. SES Technology Ventures LLC.