Call Options in 9 Minutes
A call option gives you the right, but not the obligation, to buy a share at a fixed strike price. If the stock ends above the strike, the call pays off; if not, you lose only the premium. These notes cover how calls work, their payoff and profit at expiration, and where valuation comes in.
What you will learn
- What a call option is: the right to buy at the strike price
- How to calculate call payoff and profit at expiration
- How to find the break-even price for a call buyer
- When a call is in, at, or out of the money
- Why calls give leverage with a limited downside
The formulas
- S_T
- stock price at expiration
- K
- strike (exercise) price
- Premium
- price paid for the call
- Break-even S_T
- stock price at which the buyer neither gains nor loses
Worked example
You buy a call with a $50 strike for a $4 premium. What is your payoff and profit if the stock is at $60 at expiration? What if it is at $45?
- At $60: payoff = max(60 − 50, 0) = $10.
- Profit = $10 − $4 = $6 per share.
- Break-even = $50 + $4 = $54.
- At $45: payoff = max(45 − 50, 0) = $0, so you lose the $4 premium.
Answer: At $60 you make $6 per share ($600 on a standard 100-share contract). At $45 the call expires worthless and you lose $4 per share. You break even at $54.
Common questions
How does a call option work?
You pay a premium for the right to buy a stock at the strike price until expiration. If the stock rises above the strike, you can buy low and the call pays off. If the stock stays below the strike, you simply let the call expire and lose only the premium you paid.
What is the maximum profit and loss on a call option?
For a call buyer, the most you can lose is the premium. The potential profit has no fixed cap, because the stock price can keep rising. For a call seller it is the reverse: the premium is the maximum gain and losses can be very large.
What does in the money mean for a call option?
A call is in the money when the stock price is above the strike, at the money when they are equal, and out of the money when the stock is below the strike. Being in the money doesn't guarantee a profit, because you still need to cover the premium.
Why buy a call option instead of the stock?
A call lets you benefit from a rise in the stock for a fraction of the share price, which magnifies percentage gains, while capping your loss at the premium. The trade-off is that the call can expire worthless, and you don't receive dividends.