What is a call option?
A call option is a contract that gives the buyer the right, but not the obligation, to buy 100 shares of a stock at a set strike price on or before a set expiration date. The buyer pays a premium up front for that right.
Traders buy calls when they think the stock is going up. One call controls 100 shares, so a $1 move in the stock can mean $100 in the option's value. That leverage is why calls can multiply quickly, and also why they can go to zero just as fast.
A quick example
Apple is trading at $195. You buy one AAPL $200 call expiring in 30 days for $3.50 per share. Your cost is $3.50 x 100 = $350.
- If Apple rallies to $210 before expiration, your call is worth at least $10 x 100 = $1,000. You can sell it and take the profit.
- If Apple never closes above $200, your call expires worthless and you lose the full $350 premium.
- Your break-even is $200 + $3.50 = $203.50. Apple needs to close above that at expiration for you to actually make money.
Call vs put
A call is the right to buy. A put is the right to sell. Both can be bought (long) or sold (short). This entry covers the most common beginner position: a long call, paid for with a premium, risking only that premium.