What are call options?

Scenario 3: the stock price remains at $50 or falls

• Your option expires out of the money because the stock price is the same as or below the strike price

• You choose not to exercise the option

• Loss: the premium paid, which is $200

Scenario 4: the stock price rises to $57, and you sell the contract a week before expiration

• Your option is in the money with the stock price at $57

• A week before expiration, the option might trade at $2.50 per share ($2 intrinsic value plus $0.50 extrinsic value)

• You sell the contract for $2.50 x 100 shares = $250

• Profit: $250 - $200 (initial premium paid) = $50

• Net profit: $50

Call options explained: long vs short

1. Long calls explained
2. How do I buy a call option?
3. When should you close a long call option?
4. Short calls explained
5. How do I sell a call option?
6. How implied volatility affects call option values

Long calls explained

The call buyer, or the party taking a long position, wants the stock price to increase well above the call strike price by the contract's expiration. This will enable them to either buy 100 shares of stock at a discount relative to the market price or sell the call contract for more than they paid for it. When the strike price is below the stock price, the call is considered in the money (ITM), meaning it has real value to the owner at expiration.

How do I buy a call option?

You can buy a call through our US options and futures platform. Buying a call means buying a contract with the expectation that the underlying asset’s price will increase.

Here’s how to buy a call option in five steps:

1. Open a US options and futures account by filling in a form about your trading knowledge

2. Once we’ve verified your details, fund your account with the amount you wish to trade

3. Choose your option by selecting the underlying asset, strike price, expiration date and number of contracts

4. Place your order to buy the call option

5. Manage your position by monitoring it, deciding when to sell or exercise (if your account has sufficient equity)

Example:

Suppose you believe that Amazon’s share price, currently trading at $280, will increase significantly due to a new product launch. You'd like to invest, but you don't have enough capital to buy 100 shares outright.

Instead, you decide to buy one call options contract with a strike price of $295, expiring in 30 days, for a premium of $10 per share ($1,000 total). This gives you control over the equivalent of 100 shares at a fraction of the cost of buying the shares directly.

If Amazon's stock price rises above $305 (strike price + premium) before expiration, you can sell the call option for a profit. Even if the stock doesn't reach $295, a swift bullish move could increase the option's value, enabling you to sell it for a profit.

For instance, if the option’s value rises to $25 (premium + $15) after a rally in Amazon, you could sell the contract for a $15 per share profit ($1,500 total). However, if the stock price remains below $295 at expiration, the option would expire worthless, and you'd lose the $1,000 premium paid initially.

When should you close a long call option?

Ideally, closing a long call option becomes beneficial when its value rises above the initial purchase price. This can happen when the stock price rises well above the call strike price or if there’s a swift move in the stock price well before expiration. There’s unlimited profit potential in a call option because there’s no limit to how high a stock price can go.

There are three ways to close a long call option:

1. Allow the option to expire worthless if it’s OTM. This will result in a loss limited to the initial premium paid

2. Sell the option before expiration, whether it’s OTM or ITM, potentially at a profit or to minimise losses

3. Exercise the option if it’s ITM, buying 100 shares at the strike price. Remember, this requires enough account equity. If you lack the funds to buy the shares (eg a trading account with $500 in funds can’t buy 100 Amazon shares at $200 each), you must sell the contract instead

Short calls explained

When you sell a call option, you’re taking what’s called a bearish to neutral position. Your goal is for the stock price to stay below the call strike price you agreed on. Why? Well, you would have already collected a premium upfront for selling the call. That premium will become your profit if the stock price stays below the strike and the call contract expires worthless.

You’re hoping the option will be OTM at expiration. This means it wouldn’t have any value to the person who bought it from you. Essentially, you’re speculating that the stock won’t rise above the strike price. If you’re right, you get to keep that upfront premium as pure profit. Moreover, you can lock in profits by covering or buying back the short call before expiration for less than what you sold it at if its value decreases. However, losses would occur if you covered it for more than what you sold it at.

How do I sell a call option?

Selling a call option to open means taking the opposite side of a long call transaction. For every buyer, there's a seller, forming a contract that stipulates the agreement to exchange the underlying at a predetermined price by the expiration date.

Here’s how to sell a call option in five steps:

1. Open a US options and futures margin account by completing a brief form about your trading knowledge

2. Once we’ve verified your details, fund your account with the amount you plan to trade

3. Select an underlying you have a bearish view on, an expiration date and a strike price, and decide how many contracts to sell

4. Place your order to sell (short) the call option and collect the premium

5. Monitor your position, decide when to buy back the option or let it expire

Example:

Let’s revisit the Amazon example, but this time from the seller’s perspective. Despite the new product launch, you believe Amazon’s share price of $280 won’t rise. In fact, you expect a pullback due to criticism about the product’s usefulness and practicality.

You decide to capitalise on this scepticism by shorting one call option at a strike price of $295. You collect a premium of $10 per share for selling the call, totalling $1,000.

If the stock ends up trading below $295 by the expiration date, your option will expire OTM and worthless, allowing you to keep the entire $1,000 premium as profit (excluding commission and fees).

However, it’s crucial to be aware of expiration risk: even if the option appears to be OTM at market close, after-hours price movements could still lead to assignment, potentially resulting in unexpected short stock positions.

Assignment occurs when the options buyer exercises their right, obligating the seller to fulfil the contract terms. For a short call, this means you might have to sell shares at the strike price if the stock moves above it after hours. This can lead to unexpected losses or a short stock position. To avoid this risk, consider closing your position before expiration, especially if the option is near the money.

However, if the stock rallies – say to $285 the day after you sold the option – your option might now be worth $12. This would mean an unrealised loss of $200, even though the option would still be worthless at expiration if it remained OTM.

At expiration, if the stock was at $296.50, the option would be worth around $1.50 or near its intrinsic value or $150 total. Since you collected $1,000 upfront, your realised profit would be $850 if you closed the position.

To avoid potential assignment or taking shares at expiration, you can roll the short call further out in time or close the contract to end the trade.

Calls vs puts: what's the difference?

Understanding the differences between calls and puts is crucial for options trading. Here are the key distinctions: