Call options are the most common way people start trading options. If you think a stock is going up, buying a call lets you profit from that move without buying the actual shares. Let us break down how they work.
What is a Call Option?
A call option gives you the right to buy a stock at a specific price before a specific date. You pay money upfront (the "premium") to get this right.
Think of it like a reservation: You pay a small fee now to lock in the right to buy something at today's price later. If the price goes up, your reservation becomes valuable. If it does not, you just lose the fee.
When Do Calls Make Money?
Call options increase in value when the stock price goes up. The higher the stock goes, the more valuable your call becomes.
Example
You buy a call option on stock ABC with a $100 strike price for $3.00 (that is $300 per contract).
- If the stock goes to $115, your call is worth at least $15 ($1,500 per contract). You paid $300 and now it is worth $1,500. That is a 400% return!
- If the stock stays at $100 or goes lower, your call expires worthless. You lose the $300 you paid.
Why Do People Buy Calls?
1. Leverage
Instead of paying $10,000 to buy 100 shares of a $100 stock, you can pay $300 for a call option that controls those same 100 shares. If the stock goes up 15%, you make 400% instead of 15%.
2. Limited risk
When you buy a call, the most you can lose is what you paid for it. You cannot lose more than your premium, even if the stock crashes to zero.
3. Smaller capital needed
Options let you trade big stocks even with a small account. You can buy call options on expensive stocks like Amazon or Google for a few hundred dollars.
Key Terms You Need to Know
- Strike price: The price at which you can buy the stock
- Premium: The price you pay for the call option
- Expiration date: The date when the option expires
- In the money (ITM): When the stock is above the strike price
- Out of the money (OTM): When the stock is below the strike price
- At the money (ATM): When the stock is at the strike price
The Risks of Buying Calls
- Time decay: Calls lose value every day. The clock is always working against you.
- You can lose 100%: If the stock does not go up enough, you lose everything.
- Volatility matters: Even if you are right about direction, changes in implied volatility can hurt your trade.
- Timing is hard: The stock might go up eventually, but if it happens after your call expires, you still lose.
Tips for Buying Calls
- Give yourself time: Buy calls with at least 30 to 60 days until expiration
- Do not buy too far out of the money: Cheap calls are cheap for a reason
- Have an exit plan: Know when you will take profits or cut losses
- Never risk more than you can afford to lose: Calls can go to zero fast
Track Your Options Trades
Pro Trader Dashboard tracks all your call and put trades automatically. See your win rate, best setups, and learn from your history.
Summary
Call options let you profit when stocks go up with less money than buying shares. They offer big potential returns but come with real risks. Start small, use proper position sizing, and always track your trades.
Want to learn more? Read our guide on put options or learn about credit spreads.