How Call Options Work

For U.S.-style options, a call is an options contract that gives the buyer the right to buy the underlying asset at a set price at any time up to the expiration date.

Buyers of European-style options may exercise the option— to buy the underlying—only on the expiration date. Options expirations vary and can be short-term or long-term.

With call options, the strike price represents the predetermined price at which a call buyer can buy the underlying asset. For example, the buyer of a stock call option with a strike price of $10 can use the option to buy that stock at $10 before the option expires.

*It is only worthwhile for the call buyer to exercise their option (and require the call writer/seller to sell them the stock at the strike price) if the current price of the underlying is above the strike price. For example, if the stock is trading at $9 on the stock market, it is not worthwhile for the call option buyer to exercise their option to buy the stock at $10 because they can buy it for a lower price on the market.

What the Call Buyer Gets

The call buyer has the right to buy a stock at the strike price for a set amount of time. For that right, the call buyer pays a premium. If the price of the underlying moves above the strike price, the option will be in-the-money (it will have intrinsic value). The buyer can sell the option for a profit (this is what many call buyers do) or exercise the option (receive the shares from the person who wrote the option).

What the Call Seller Gets

The call writer/seller receives the premium. Writing call options is a way to generate income. However, the income from writing a call option is limited to the premium, while a call buyer has theoretically unlimited profit potential.