Call Options

A call option is a contract between two parties - a buyer and a seller (the seller is commonly referred to as the "writer"). A call option gives is the option to buy shares of stock at a specified price (called the strike price) and time (called the expiration date) in the future. The option buyer has the right, but not the obligation to buy the underlying financial instrument from the option seller. The seller  is obligated to sell the underlying financial instrument if the buyer decides to make the purchase (this is referred to as exercising the option).

People buy calls because they expect the underlying stock to go up. If the stock does go up they make a profit either by selling the calls at a higher price, or by exercising their option (i.e., buy the shares at the strike price and sell at the current market price).

Call options are quoted in dollar terms, but they actually cost 100 times the quoted amount.  For example, a call option quoted at $2.25 will actually cost $225.00. The commission for buying options is usually around $1.50 per contract.


Payoff from buying a call: Payoff from writing a call:
stock option long call stock option short call