Options 101: Buying a Call

The how and why of long call options

by Lillian Currens

    Published on Oct 12, 2018 at 10:14 AM

    In the simplest terms, a call option gains value when the underlying stock rises. Buying a call is essentially a bullish bet that gives the trader the right, but not the obligation, to purchase the underlying shares for a specific price (the strike price) before an expiration day.

    Let's say Stock XYZ is trading at $39.50. A trader speculates that the price will rise in the short term. He or she then purchases a November 41 call, expiring on Nov. 16, for a $1.50 premium.

    The hope is that the underlying asset will rise well above $42.50 by the expiration date, which represents breakeven (call strike + premium paid) on the trade. Specifically, the trader's profit will accumulate the higher XYZ rises above $42.50 before expiration, with profit potential theoretically unlimited.

    The contract can be sold to close before it expires, in which case the trader's profit would stem from the gain in the option's premium over the lifetime of the trade. Or, if the trader wants to own the shares of XYZ, he or she can exercise the in-the-money call -- meaning they can buy the stock for $41 per share (the strike price), representing a discount to what they'd pay on the Street.

    So, why buy call options instead of just purchasing the stock outright? For one, there's limited risk involved in purchasing a call. The trader can only lose as much as the premium he or she initially paid. If Stock XYZ in the example above plummeted to $30, the shareholder would be out big bucks, while the call buyer would be out just the $1.50 paid at initiation.

    Stocks to Buy Before a Fed Rate Hike
    The central bank is widely expected to hike interest rates on Wednesday
    Breaking Down the Quick & Dirty S&P Drop
    The SPX fell more than 10% in 50 sessions
    Bet on This Medical Device Stock to Break Out
    The shares could be poised to break out of recent congestion below $245
    From Schaeffer's Pro Traders
    Weekly Options Secrets Revealed

    Direct from our Schaeffer's traders, your FREE guide to winning with weekly options!


    Partnercenter


    NEW! Explore Schaeffer’s Partners' deals and get connected to top online brokerages with deals tailored exclusively for our readers.  Get answers to your questions regarding transfer fees, commission rates, programs and available discounts related to online trading services.

    MORE | MARKETstories


    Former Hedge-Fund Manager Reveals Stunning Research
    This stunning research revealed by the former hedge-fund who predicted the last NASDAQ crash could have some Americans thinking twice before hoarding cash.
    Inside the Big Moves from Navistar and Rent-A-Center Stocks
    Two of today's biggest stock moves are coming from NAV and RCII
    Take-Two Levels Up On Analyst Coverage
    Shares of TTWO are up after Buckingham Research weighed in
    Former Hedge-Fund Manager Reveals Stunning Research
    This stunning research revealed by the former hedge-fund who predicted the last NASDAQ crash could have some Americans thinking twice before hoarding cash.