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Glossary

Call Option

A call option is a contract that gives its buyer the right, but not the obligation, to buy a specified quantity of an underlying asset at a set price before or on a set expiration date.

What Is a Call Option?

A call option is a type of derivative contract tied to an underlying asset, most often a stock. The buyer pays a fee, called the option premium, to the seller, who is also called the writer. In return, the buyer gains the right to purchase the underlying asset at a fixed price, known as the strike price, on or before a specified expiration date. The buyer is never required to exercise this right.

How It Works

Each standard stock option contract typically covers 100 shares of the underlying stock. An investor who buys a call hopes the price of the stock will rise above the strike price before expiration. If it does, the call gains value, because the holder can buy at the lower strike price and either sell the option or exercise it. If the stock stays below the strike price, the option generally expires worthless, and the buyer loses only the premium paid.

The seller of a call takes the opposite side. The seller collects the premium but must deliver the shares at the strike price if the buyer exercises. A seller who does not own the shares is said to be selling a "naked" call, which carries potentially unlimited risk because a stock's price has no fixed upper limit.

Example

Suppose a stock trades at 50 dollars, and an investor buys a call with a strike price of 55 that costs 2 dollars per share, or 200 dollars for one contract. If the stock rises to 65 before expiration, the call is worth at least 10 dollars per share, since the holder can buy at 55 and the shares trade at 65. If the stock stays below 55, the investor's loss is limited to the 200 dollar premium.

Why It Matters to Investors

Call options are used for speculation, for gaining exposure to a stock with less upfront capital than buying shares, and for hedging or generating income in combination with stock holdings. Their defined cost for buyers and their leveraged payoff make them useful tools, but they also carry risks. Options can lose all their value, their prices are affected by implied volatility and time decay, and their pricing is commonly estimated with models such as the Black-Scholes model.

Updated October 16, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Derivative

A derivative is a financial contract whose value depends on, or is derived from, the price of an underlying asset, index, interest rate, or other reference point.

Option Premium

The option premium is the price a buyer pays the seller to acquire an options contract, which the seller keeps whether or not the option is exercised.

Implied Volatility (IV)

Implied volatility is the level of future price movement that the market expects for an asset, inferred backward from the current market price of its options.

Black-Scholes Model (BSM)

A mathematical model that estimates the theoretical fair price of a European-style option using the underlying stock price, strike price, time to expiration, risk-free interest rate, and volatility.

Put Option

A put option is a contract that gives the buyer the right, but not the obligation, to sell a specified amount of an underlying asset at a set price before or on a set expiration date.

Strike Price

The strike price is the fixed price at which the holder of an option can buy or sell the underlying asset, such as a stock, when the option is exercised.

Expiration Date

The expiration date is the last day on which a derivative contract, such as an option or futures contract, remains valid and can be exercised, after which it becomes void.

Intrinsic Value

Intrinsic value is an estimate of an asset's true worth based on its underlying fundamentals, such as expected cash flows, rather than its current market price.