What Is a Call Option?

A call option is a contract that gives its buyer the right, but not the obligation, to buy an underlying asset at a fixed price -- the strike price -- on or before the option's expiration date.

How a Call Option Works

The buyer of a call pays a premium up front for that right. If the underlying price rises above the strike, the call gains value; if it stays below the strike through expiration, the call expires worthless and the buyer's loss is limited to the premium paid.

• Right to buy, not an obligation
• Profits when the underlying rises above the strike plus the premium paid
• Maximum loss is limited to the premium paid

See a Call Option's Payoff Yourself

The clearest way to understand a call option is to see its payoff graph. Enter a strike and premium in OptionLab's calculator to see exactly where a call breaks even and how far it can gain.