Buying call options is one of the most fundamental strategies in options trading. It gives you the right to purchase shares of a stock at a specific price within a set time frame. If you are bullish on a stock and want to leverage your capital, buying calls might be the perfect strategy for you. In this guide, we will walk through everything you need to know about buying call options.
What is a Call Option?
A call option is a contract that gives you the right, but not the obligation, to buy 100 shares of a stock at a predetermined price (called the strike price) before a specific date (called the expiration date). When you buy a call option, you pay a premium upfront for this right.
Key concept: When you buy a call option, you are betting that the stock price will rise above your strike price before expiration. The higher the stock goes, the more profit you can make.
Why Do Traders Buy Call Options?
There are several reasons why traders choose to buy call options instead of just buying the stock:
- Leverage: Control 100 shares of stock for a fraction of the cost
- Limited risk: Your maximum loss is the premium you paid
- Unlimited profit potential: There is no cap on how much you can make
- Lower capital requirement: Enter positions with less money than buying shares outright
How to Choose the Right Call Option
Selecting the right call option involves several key decisions:
1. Select Your Strike Price
The strike price determines how much the stock needs to move for you to profit. Here are your options:
- In-the-money (ITM): Strike price below current stock price. Higher cost but higher probability of profit
- At-the-money (ATM): Strike price near current stock price. Balance of cost and probability
- Out-of-the-money (OTM): Strike price above current stock price. Lower cost but lower probability of profit
2. Choose Your Expiration Date
The expiration date affects both the price and probability of success:
- Shorter expirations (1-2 weeks): Cheaper premiums but faster time decay
- Medium expirations (30-60 days): Good balance of cost and time
- Longer expirations (90+ days): More time for the trade to work but higher premium cost
Example: Buying a Call Option
Stock XYZ is trading at $50. You believe it will rise to $60 in the next month.
- You buy 1 call option with a $55 strike price
- Expiration: 30 days out
- Premium paid: $2.00 per share ($200 total)
- Breakeven price: $57 ($55 strike + $2 premium)
If XYZ rises to $65 at expiration, your call is worth $10. After subtracting your $2 cost, your profit is $8 per share, or $800 total. That is a 400% return on your investment.
Understanding Call Option Pricing
The price you pay for a call option (the premium) is made up of two components:
- Intrinsic value: The amount the option is in-the-money. If stock is at $55 and your strike is $50, intrinsic value is $5
- Extrinsic value: The time value and implied volatility premium. This decreases as expiration approaches
When to Buy Call Options
Call options work best in certain market conditions:
- Bullish outlook: You expect the stock to rise significantly
- Before catalysts: Earnings, product launches, or other events that could move the stock
- Low implied volatility: Options are cheaper when IV is low
- Technical breakouts: When a stock breaks above key resistance levels
Calculating Your Profit and Loss
Understanding your potential outcomes is crucial before entering any trade:
- Maximum loss: The premium you paid (occurs if stock is below strike at expiration)
- Breakeven point: Strike price plus premium paid
- Profit formula: (Stock price - Strike price - Premium paid) x 100
Profit Calculation Example
You buy a $100 strike call for $3.00 premium ($300 total).
- If stock is at $95 at expiration: Loss = $300 (full premium)
- If stock is at $103 at expiration: Breakeven (no profit or loss)
- If stock is at $110 at expiration: Profit = ($110 - $100 - $3) x 100 = $700
- If stock is at $120 at expiration: Profit = ($120 - $100 - $3) x 100 = $1,700
Risk Management for Call Buyers
Even though your risk is limited to the premium paid, you should still manage your positions carefully:
- Position sizing: Never risk more than 2-5% of your account on a single trade
- Set profit targets: Consider selling when you have 50-100% gains
- Cut losses early: If the trade is not working, exit before losing 100%
- Avoid holding to expiration: Time decay accelerates in the final weeks
Common Mistakes to Avoid
New call option buyers often make these errors:
- Buying too far out-of-the-money: Cheap options often expire worthless
- Ignoring time decay: Options lose value every day, especially near expiration
- Overpaying for volatility: Buying before earnings when IV is extremely high
- Not having an exit plan: Know when you will sell before you buy
Step-by-Step: How to Place Your First Call Option Trade
- Research the stock and confirm your bullish outlook
- Check the options chain for available strike prices and expirations
- Calculate your breakeven price and potential profit
- Review the bid-ask spread to ensure good liquidity
- Enter a limit order at a fair price
- Set your profit target and stop loss levels
- Monitor the position and adjust as needed
Track Your Call Option Trades
Pro Trader Dashboard automatically imports and tracks all your options trades from Robinhood. See your win rate, average profit, and identify which call strategies work best for you.
Summary
Buying call options is a powerful way to profit from bullish moves in the stock market while limiting your risk. Choose strike prices and expirations that match your outlook, manage your position size carefully, and always have an exit plan. With practice and discipline, buying calls can be a valuable addition to your trading toolkit.
Ready to learn more? Check out our guide on what call options are or learn about buying put options for bearish trades.