What a call option grants you
Explain what a call option is, what it costs, and what right it gives the buyer.
Lesson path
Options, Risk Math, and Psychology
Options Anatomy
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Explain what a call option is, what it costs, and what right it gives the buyer.
A call is a right to buy at a fixed price
A call option is a contract. The buyer of a call gets the right — not the obligation — to BUY a stock at an agreed-upon price (the strike price) before a specific date (the expiry). For owning that right, the buyer pays a small fee upfront called the premium. The seller (also called the writer) collects that premium and takes on the matching obligation: if the buyer chooses to exercise, the seller has to deliver the shares at the strike price.
Plain-English example. AAPL trades at $200. You think it'll rip to $220 in the next month. You buy one AAPL call with a $205 strike, expiring four weeks out, for $3.00 per share. Because one US equity option contract covers 100 shares, you pay $300 total ($3.00 x 100). That $300 is the most you can lose. If AAPL ends at $215 at expiry, your right to buy at $205 is worth $10 per share — you make $1,000 minus the $300 you paid, so $700 profit. If AAPL ends at $204, your right is worthless, and you lose the full $300.
Why people buy calls: leverage and defined risk. With $300, you couldn't buy a meaningful number of $200 AAPL shares. But a $300 call premium controls 100 shares' worth of upside. If you're right, your percentage return is huge. If you're wrong, you lose $300 — not $20,000. The trade-off: you have to be right about direction AND timing. The stock has to move enough, fast enough, before expiry.
Recap: a call = the right to buy at a strike by an expiry, for a premium. Max loss = premium paid. Upside = unlimited above the strike (minus premium). You're betting on direction AND timing.
Knowledge check
Answer before moving on.
1. You buy one AAPL $205 call for a $3.00 premium. At expiry, AAPL is at $210. Roughly what happens?
2. What's the maximum loss when you BUY a single call option?
3. True or false: a call option gives you the OBLIGATION to buy the stock at the strike price.
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