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. This guide from OptionLab (option-graph.com) explains how a call works, walks through a numerical example with per-share and per-contract amounts, and shows how to read its payoff.
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 at expiration when the underlying rises above the strike plus the premium paid
- Maximum loss for the buyer is limited to the premium paid
The Terms Every Call Contract Specifies
Every call is defined by a few fixed terms. The underlying is the asset the option refers to, such as a stock or an index. The strike is the price at which the buyer may buy. The expiration date is when the right ends. The premium is the price of the option itself, set by trading in the market.
One detail causes many beginner mistakes: premiums are quoted per share, but a standard US equity option contract covers 100 shares. A premium of $5 therefore costs $500 for one contract. The calculators on option-graph.com keep the two apart: you enter the premium per share and set the number of shares per contract separately, so the payoff is shown in dollars for the whole position.
Buying a Call vs. Writing a Call
Every option has two sides. The buyer (holder) pays the premium and receives the right. The writer (seller) receives the premium and takes on the obligation to sell the underlying at the strike if the option is exercised. The buyer's risk is capped at the premium; the writer's risk is not.
If the stock in the example below finishes at $115, the buyer's call is worth $15 per share, and the writer, who kept the $5 premium, loses $1,000 on one contract ($10 per share × 100). Because a stock price has no ceiling, an uncovered call writer's potential loss has no fixed limit. You can model both sides on option-graph.com by switching a leg between Buy and Sell.
A Simple Numerical Example
Suppose you buy one call with a $100 strike for a $5 premium. Premiums are quoted per share, which is also how they are entered on option-graph.com; one contract of 100 shares costs $500. At expiration:
- Underlying at $95: the call expires worthless, and the loss is the $5 premium, or $500 per contract.
- Underlying at $103: the payoff is $3, less than the $5 premium, so the trade still loses $2 per share, or $200 per contract.
- Underlying at $115: the payoff is $15; after the premium, the net profit is $10 per share, or +$1,000 per contract.
The breakeven at expiration is the strike plus the premium: $100 + $5 = $105. The buyer's maximum loss is the premium paid, while the upside is theoretically unlimited because the underlying price has no ceiling.
Long call at expiration: $100 strike, $5 premium
Profit zoneLoss zoneK = StrikeBE = Breakeven
| Point | US dollars per contract (100 shares) |
|---|---|
| Strike 100 | −500 |
| Breakeven 105 | 0 |
| P/L at 80 | −500 |
| P/L at 130 | +2,500 |
- One contract = 100 shares
- Premium $5.00 per share, paid in full at purchase
- Held to expiration; commissions, fees and taxes excluded
Value Before Expiration vs. Result at Expiration
The numbers above are the result at expiration, when only the gap between the stock price and the strike matters. Before expiration, a call is usually worth more than that gap, because it still has time value: the chance that the stock moves further before the right ends. That is why a call can trade above zero even while the stock is below the strike.
Time value shrinks as expiration approaches, and it also changes with implied volatility. A buyer can close the position early by selling the call, and the price received then depends on all of these factors -- not only on the stock price. The Black-Scholes calculator on option-graph.com shows a theoretical value before expiration for inputs you choose.
Why Investors Buy Calls
- To gain from a rise in the underlying with a maximum loss known in advance
- To fix a purchase price for a limited time, instead of buying the shares today
- To control exposure to 100 shares for a smaller outlay -- which also magnifies the percentage loss if the stock does not rise enough
None of these uses removes risk. A call can expire worthless even when the stock rises, if it does not rise above the breakeven before expiration. Each of these cases can be laid out on option-graph.com before any money is committed.
Risks and Limitations
The buyer can lose the entire premium, and that happens often when the stock stays below the strike. Leverage works in both directions: a small move in the stock can mean a large percentage change in the option's price. Wide bid-ask spreads and commissions add to the cost of every trade, and the writer of an uncovered call faces losses that are not capped. Before trading, check the payoff of the exact position -- strike, premium, size and expiration -- on option-graph.com or with your broker's tools.
See a Call Option's Payoff Yourself
The clearest way to understand a call option is to see its payoff graph. Enter the example above -- a $100 strike and a $5 premium -- in OptionLab's calculator on option-graph.com to see the $105 breakeven and how far a call can gain.
Try the Options Profit Calculator →Explore built-in option strategy templates →Key Takeaways
- A call gives the right to buy at the strike until expiration; the writer has the matching obligation.
- Premiums are quoted per share; one standard US contract covers 100 shares.
- At expiration, breakeven = strike + premium; the buyer's loss is capped at the premium.
- Before expiration, the call's value also includes time value.
OptionLab (option-graph.com) is an educational and analytical tool. It does not provide personalized investment advice, and all trading decisions are the user's own responsibility. For the basics of options in general, start with the option-graph.com guide below.
Read: What Is an Option? →