Call Option

A call option is a contract between two parties that gives the buyer the right, but not the obligation, to purchase a specific stock (or other asset) at a set price before a certain date. That set price is called the strike price, and the date is the expiration date. The person who sells (or "writes") the call takes on the obligation to sell the stock at that price if the buyer chooses to exercise the right.

In practice, most traders don't buy calls to actually take delivery of shares. They buy them because the contract itself has a price, called the premium, and that premium moves up and down as the underlying stock's price moves. If the stock rises above the strike price, the call becomes more valuable, because it now represents the right to buy something cheap relative to its market price. Traders can sell the call back at a profit without ever owning the underlying shares.

One call option typically controls 100 shares of stock, so its price moves are amplified compared to owning the shares outright. A small move in the stock can translate into a much larger percentage move in the option's premium, in either direction. This leverage is the main reason calls attract short-term traders, and also why they can lose their entire value quickly if the stock doesn't cooperate before expiration.

The nuance that trips up beginners is the difference between a call being "in the money" and merely being cheap. A call is in the money when the stock price is above the strike price, meaning it has real, tangible value. A call can also expire worthless, at zero, if the stock never rises above the strike, even by expiration day. Time works against the option buyer: as expiration approaches, a call loses value from the passage of time alone, a process known as time decay, separate from whatever the stock is doing.