Call Options Explained
A call option gives you the right to buy a stock at a specific price (strike price) before the expiration date. Understanding calls is essential for both directional trading and income strategies.
What Buying a Call Means
When you buy a call option, you pay a premium (the cost of the option) to gain the right to purchase 100 shares of a stock at the strike price.
Example: Buying a Call
Stock: Apple (AAPL) trading at $150
You buy: 1 call option with $155 strike, expiring in 30 days
Premium paid: $3.00 per share = $300 total (100 shares × $3)
If AAPL rises to $165: Your call is worth at least $10 ($165 - $155), giving you a profit of $700 ($1,000 - $300 premium).
If AAPL stays below $155: Your call expires worthless, and you lose the $300 premium.
Best for: Bullish directional bets with limited risk (you can only lose the premium paid).
What Selling a Call Means
When you sell a call option, you receive a premium and take on the obligation to sell 100 shares at the strike price if the buyer exercises.
Example: Selling a Covered Call
You own: 100 shares of AAPL at $150
You sell: 1 call option with $160 strike, expiring in 30 days
Premium received: $2.50 per share = $250 total
If AAPL stays below $160: The call expires worthless, you keep the $250 premium and your shares.
If AAPL rises above $160: Your shares may be called away at $160, but you still keep the $250 premium plus the $10 gain per share.
Best for: Generating income on stocks you own. See Covered Calls strategy.
Strike Price
The strike price is the price at which you can buy the stock if you exercise your call option.
In-the-Money (ITM): Strike < Current Stock Price
The call has intrinsic value. Example: Stock at $150, strike at $140 = $10 intrinsic value.
At-the-Money (ATM): Strike = Current Stock Price
The call has no intrinsic value, only time value. Most sensitive to price movements.
Out-of-the-Money (OTM): Strike > Current Stock Price
The call has no intrinsic value, only time value. Cheaper but requires stock to move up to be profitable.
Expiration
Every option has an expiration date. After this date, the option becomes worthless if not exercised. Options typically expire on the third Friday of each month, though weekly options are also available.
Learn more about expiration and settlement.
Intrinsic vs Extrinsic Value
Intrinsic Value
The real, tangible value of the option if exercised immediately.
Formula: Current Stock Price - Strike Price (for calls)
Example: Stock at $150, strike at $140 = $10 intrinsic value
Extrinsic Value (Time Value)
The premium above intrinsic value. Represents the potential for the option to gain value before expiration.
Formula: Option Price - Intrinsic Value
Example: Option priced at $12, intrinsic value $10 = $2 extrinsic value
Extrinsic value decays over time (see Theta). This is how income traders profit—by selling options and collecting premium as time value decays.