Call option

A call option is a contract that gives its buyer the right, but not the obligation, to buy an underlying stock at a fixed strike price on or before the expiration date. The buyer pays a premium to the seller (the writer), who takes on the obligation to sell the shares if the option is exercised.

How it works

Standard US equity options cover 100 shares per contract and are American style, so they can be exercised any time before expiration. Prices are quoted per share: a call quoted at $2.50 costs $250 per contract.

• Buyer: maximum loss is the premium paid. Upside is open-ended as the stock rises.
• Seller: collects the premium. A seller who owns the shares is running a covered call; one who does not faces theoretically unlimited loss.
• Breakeven at expiration: strike plus premium paid.

Why it matters for traders

Calls offer leveraged upside exposure for a fixed, known cost. That leverage cuts both ways: the stock has to move far enough, fast enough, to beat time decay. A common trap is buying calls ahead of earnings or an FDA decision, getting the direction right, and still losing money because implied volatility collapses once the news is out.

Heavy call buying before a catalyst can also show up as unusual options activity, which some traders monitor as a sentiment signal.

Example

A hypothetical biotech, Northwind Therapeutics (NWTX), trades at $40. A trader buys one $45 call expiring in 60 days for $1.50, paying $150. Breakeven at expiration is $46.50.

• If NWTX closes at $52 on expiration day, the call is worth $7.00 ($700). Profit: $550.
• If NWTX closes at $44, the call expires worthless. Loss: $150.

FAQ

Can you lose more than you paid for a call option?

Not as a buyer. The most a call buyer can lose is the premium. Sellers of uncovered calls can lose far more.

What happens if my call is in the money at expiration?

Equity options that finish in the money by $0.01 or more are generally exercised automatically, which means you buy 100 shares per contract at the strike. Many traders sell the option before the close to avoid needing the cash.