Glossary
Call option
A contract giving the buyer the right, not the obligation, to buy the underlying asset at the strike price before expiration.
On this page
A call option is a contract that gives its buyer the right, but not the obligation, to buy 100 shares of an underlying stock (or another asset) at a fixed price, the strike price, on or before a set expiration date. The buyer pays a price called the premium for that right. Calls let traders bet on a rise with limited money at risk, and let shareholders earn income by selling them.
How it works
The buyer profits if the stock rises above the strike by more than the premium paid. The seller (writer) keeps the premium but must deliver shares at the strike if assigned.
Key things to understand
- Leverage cuts both ways. A call can lose 100% of its value even when the stock rises a little or stays flat.
- Time decay. All else equal, a call loses value as expiration approaches, which works against buyers and for sellers.
- Selling calls. A covered call (selling a call against shares you own) caps your upside in exchange for income. A naked call (without owning the shares) has theoretically unlimited risk and requires high options approval and margin.
- Most listed US stock options are American style, so a short call can be assigned before expiration.