Glossary · Funds and derivatives
Call option
A call option is the right to buy a stock or other asset at a set price (the strike) until a set date. It gains value when the price rises.
Also called: call, calls, buying calls, covered call
When a 1-year call struck 10% above the price would have ended in the money. It rose at all in 75% of them.
In plain words
A call option is a ticket that lets you buy something at a fixed price, the strike, until the ticket expires. If the market price climbs above the strike, the ticket is valuable: you can buy cheap and sell at the market price. If it does not, you let the ticket expire and lose only what you paid for it, the premium.
Say a share costs $100 and a call with a $100 strike costs $5. If the share ends at $130, the call is worth $30 and you made $25 on a $5 bet. If it ends at $90, the call is worth nothing and you lost $5.
Someone sold you that call. The seller (the writer) keeps your $5 but must deliver the share at $100 if you ask. Investors who own the share often sell calls on it for extra income: a covered call.
Example
Breakeven and payoff
A call on 100 shares, strike $100, premium $5 a share ($500 in all), expiring in six months.
- Breakeven = strike + premium = $105.
- Share at $95 at expiry: the call expires worthless. Loss: $500.
- Share at $105: the call is worth $5 a share, exactly what you paid. Profit: $0.
- Share at $125: worth $25 a share, $2,500. Profit: $2,000, four times your $500.
- For the seller it is the mirror image: +$500 at $95, $0 at $105, −$2,000 at $125.
A call buyer needs the price to rise by more than the premium before expiry; the seller hopes it does not.
One level deeper
A call is “in the money” when the share price is above the strike, “at the money” when they are equal and “out of the money” when it is below. An out-of-the-money call is cheap because it may never pay; time and expected swings are all its value.
Calls give built-in leverage: a small premium controls 100 shares. That is why buying calls is a favorite way to bet on a rally, and why so many calls expire worthless. When many people buy calls on one stock, the dealers who sold them buy the shares to hedge, which can push the price up further (a “gamma squeeze”, often part of a short squeeze).
Companies pay many employees with stock options, which are calls on their own shares, usually locked up for some years.
How often a 1-year call 10% above the price would have paid off
Each point is the change in the S&P 500’s price over the previous 12 months. Above the dashed line, a one-year call with a strike 10% above the starting price ended in the money: in 53% of the 922 periods since 1950. Whether it made a profit depends on the premium, which this chart leaves out.
The numbers behind the chart
| Date | S&P 500, change over 12 months |
|---|---|
| Jan 1950 | 9.9% |
| Dec 1950 | 19.4% |
| Dec 1960 | −3.8% |
| Dec 1970 | −1.2% |
| Dec 1980 | 23.8% |
| Dec 1990 | −5.7% |
| Dec 2000 | −6.8% |
| Dec 2010 | 11.8% |
| Dec 2020 | 16.3% |
| Dec 2022 | −16.3% |
| Dec 2023 | 19.8% |
| Dec 2024 | 28.3% |
| Dec 2025 | 14.0% |
| Oct 2026 | 14.7% |
Why it matters
Calls let investors bet on a rise while risking only the premium.
Selling covered calls is a common way to earn extra income from shares you own, at the cost of giving up gains above the strike.
Heavy call buying in a single stock can itself move the price, as dealers hedge what they sold.
A common mistake
Myth: If the stock goes up, my call option makes money.
In fact: It has to go up by more than the premium, and before expiry. A $100-strike call bought for $5 loses money if the share ends anywhere below $105, even if it rose from $95.
Questions people ask
What happens when a call option expires?
If the share is above the strike, the call is worth the difference and is usually exercised or settled automatically; if it is at or below the strike, it expires worthless and the buyer loses the premium.
What is a covered call?
Selling a call on shares you already own. You collect the premium; in return, if the price rises above the strike, your shares are sold at the strike and you miss the gain beyond it.
Can you lose more than you paid for a call?
Not as a buyer: the most you can lose is the premium. A seller of a call who does not own the shares can lose without limit if the price soars.
Read more on BigCapital
About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- S&P Composite price and total return since 1871, and US consumer prices: Robert J. Shiller, Online Data (shillerdata.com); total return with dividends reinvested monthly, calculated by BigCapital.
- This page explains a term. It is not investment advice.