How It Works
A call option gives the holder the right, but not the obligation, to buy 100 shares of an underlying stock at a specified strike price before or at the expiration date. The buyer pays a premium upfront for this right. When the stock price rises above the strike price at expiration, the option is "in the money" (ITM). The buyer can exercise the option to buy shares at the lower strike price, then sell them at the higher market price. If the stock price stays at or below the strike price, the option expires worthless and the buyer loses the premium paid.
Example Problem
You buy 1 call option contract with a strike price of $100 for a premium of $5 per share. Your total cost is $5 × 100 = $500. If the stock is at $115 at expiration, what is your profit?
- Contract cost: $5 × 100 shares × 1 contract = $500
- Intrinsic value at expiration: ($115 − $100) × 100 = $1,500
- Net profit: $1,500 − $500 = $1,000
- Break-even price: $100 + $5 = $105
Key Concepts
Key terms: Strike Price (K) is the price at which the option holder can buy the stock. Premium is the cost per share to buy the option contract — total contract cost is Premium × 100 × Number of Contracts. Break-Even Price equals Strike Price + Premium. Maximum Loss is limited to the total premium paid (the contract cost). Maximum Gain is theoretically unlimited since a stock price can rise without bound.
Frequently Asked Questions
When should I buy a call option?
Call options are typically purchased when you expect the underlying stock price to increase significantly before the expiration date. They provide leveraged exposure to upside movements while limiting your downside to the premium paid.
What happens if the stock price stays below the strike price?
The option expires worthless and you lose the entire premium paid. This is the maximum possible loss when buying a call option.
What is the break-even stock price for a call option?
For a long call option, the break-even price equals the strike price plus the premium per share. The stock must trade above this level at expiration for you to realize a net profit.
How does the number of contracts affect my position?
Each additional contract multiplies both your potential profit and your total cost (and therefore maximum risk) proportionally. For example, buying 5 contracts instead of 1 means your premium cost, potential profit, and maximum loss are all 5 times larger.
Related Calculators
- Put Option CalculatorCalculate put option profit, loss, and break-even
- Interest Rate CalculatorSolve for interest rate from financial terms
- Compounding Factor CalculatorCalculate compound interest growth factors
- Z-Score CalculatorNormal distribution probabilities for options pricing
- Rule of 72 CalculatorEstimate investment doubling time
Related Sites
- Hourly SalariesHourly wage to annual salary converter
- Dollars Per HourWeekly paycheck calculator with overtime
- LoanChopLoan prepayment and extra payment calculator
- Compare 2 LoansSide-by-side loan comparison calculator
- Percent Off CalculatorDiscount and sale price calculator
- CameraDOFDepth of field calculator for photographers