Call Option
A call option gives the holder the right to buy an underlying asset at a specified strike price before the expiration date.
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Exam Tip
Call buyer is bullish. Max loss = premium. Breakeven = strike + premium.
What is a Call Option?
A call option is a contract that gives the buyer the right (but not obligation) to purchase an underlying asset at a predetermined price (strike price) within a specific time period.
Call Option Basics
| Party | Position | Outlook | Rights/Obligations |
|---|---|---|---|
| Buyer (Long) | Pays premium | Bullish | Right to buy at strike |
| Seller (Short) | Receives premium | Bearish/Neutral | Obligation to sell if assigned |
When to Buy a Call
- You believe the stock price will RISE
- You want leverage (control shares for less money)
- You want limited downside (max loss = premium)
Breakeven Point
Breakeven = Strike Price + Premium Paid
Example: Buy a $50 call for $3 premium
- Breakeven = $50 + $3 = $53
- Stock must rise above $53 for profit
Call Option Outcomes at Expiration
| Stock Price | Option Status | Action |
|---|---|---|
| Below strike | Out of the money | Expires worthless |
| At strike | At the money | Typically expires worthless |
| Above strike | In the money | Exercise or sell |
Study This Term In
Related Terms
Option
An option is a contract giving the holder the right, but not the obligation, to buy (call) or sell (put) an asset at a specified price before a certain date.
Put Option
A put option gives the holder the right to sell an underlying asset at a specified strike price before the expiration date.
Premium (Insurance)
An insurance premium is the amount paid by the policyholder to the insurance company for coverage, typically paid monthly, quarterly, or annually.
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