Call Option

Stock trading dictionary: meaning, example and how traders use it.

Last updated: October 17, 2026

Definition: Call Option is a contract that gives its buyer the right, but not the obligation, to buy 100 shares of an underlying stock at a set strike price on or before an expiration date, in exchange for paying a premium.

How a call option works

A call is one of the two basic types of option contracts. The buyer pays a premium to the seller (the writer). In return, the buyer may purchase the underlying shares at the strike price until expiration. Standard US equity options cover 100 shares, so a premium quoted at $2.00 costs $200 per contract.

A call is in the money when the stock trades above the strike, at the money near the strike, and out of the money below it. Its premium reflects intrinsic value plus time value, which is influenced by the time left until expiration and the stock's expected volatility.

Call option example

Suppose a stock trades at $50 and you buy one call with a $55 strike expiring in three months for a premium of $2.00, or $200 total. Your breakeven at expiration is $57 (strike plus premium).

  • If the stock rises to $62, the call is worth at least $7.00, or $700. Your profit is $500 on a $200 outlay.
  • If the stock finishes at $56, the call is worth $1.00, and you lose $100.
  • If the stock stays below $55, the call expires worthless and you lose the full $200.

That asymmetry, limited loss and large potential gain, is why calls provide leverage compared with buying 100 shares outright for $5,000.

How traders use call options

Buyers use calls to express a bullish view with capped risk or to lock in a purchase price. Sellers collect premium in exchange for an obligation to deliver shares; selling calls against stock you already own is a covered call strategy. Traders may also combine long and short calls into spreads, such as a bull call spread. Calls are derivatives, so their value moves with the underlying stock but faster in percentage terms.

Call vs put and key risks

A call profits from rising prices, while a put option profits from falling prices. The main risk for call buyers is time decay: even if the stock moves the right way, it must do so far enough and soon enough to cover the premium. Uncovered (naked) call writers face theoretically unlimited loss if the stock surges, and brokers require approval and margin for that strategy.

Buying a call vs buying the stock

Owning 100 shares costs the full purchase price, carries no expiration date and collects any dividends. Buying a call costs far less up front and caps the maximum loss at the premium, but the position has a limited life and earns no dividends. In the example above, a stock buyer who paid $5,000 would still own the shares if the price dipped temporarily, while the call buyer could lose the entire premium if the rebound arrived after expiration. Choosing between the two depends on your time horizon, your conviction about the size and timing of the move, and how much capital you are willing to risk. Many traders size option positions as a small fraction of their account for this reason.

Frequently asked questions

What is the most you can lose buying a call option?

The most a call buyer can lose is the premium paid plus commissions. The option simply expires worthless if the stock stays at or below the strike.

Do I have to buy the shares if I own a call?

No. A call gives the right, not the obligation. Most traders close the position by selling the option before expiration instead of exercising it.

When should a call option be exercised early?

For calls on non-dividend stocks, early exercise rarely makes sense because it forfeits remaining time value. It is sometimes considered just before an ex-dividend date.

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For information only, not investment advice. See the disclaimer.