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What are call options?
Call options are financial contracts giving you the right, but not the obligation, to buy a specific asset at a predetermined price within a set timeframe.
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Visit help and support for more information.
Call 0800 409 6789 or email helpdesk.uk@ig.com if you have any questions about trading or investing. We're available 24/7 between 8am Saturday and 10pm Friday.
Contact us 0800 409 6789
Call 0800 195 3100 or email newaccounts.uk@ig.com to talk about opening an account.
Contact us 08001953100
Get info fast via our instant help and support portal. Available for account queries, ProRealTime, product info and more.
Visit help and support for more information.
Get info fast via our instant help and support portal. Available for account queries, ProRealTime, product info and more.
Visit help and support for more information.
Call 0800 409 6789 or email helpdesk.uk@ig.com if you have any questions about trading or investing. We're available 24/7 between 8am Saturday and 10pm Friday.
Contact us 0800 409 6789
The content on this page relates specifically to listed options, which can be traded using our US options and futures account.
What are call options?
A call option is a financial contract between two parties – the buyer and the seller (also known as the writer). The buyer of a call option has the right to buy a specific asset, known as the underlying asset, at a predetermined price (the strike price) on or before a certain date (the expiration date). For this right, the buyer pays a premium to the seller.
Note: for the sake of simplicity, on this page, we’ll focus on call options on equities (ie call options where the underlying asset is a stock), but keep in mind that other types of call options are available. Each standard equity options contract represents 100 shares of the underlying stock, and any explanations or examples given will use this as their basis.
Call options are essentially the opposite of put options, which give the buyer the right to sell the underlying asset.
If the price of the underlying asset (stock, in the case of an equities call option) rises above the strike price, you can exercise the option to buy the stock at the lower strike price, potentially buying the shares below market value. The seller, or counterparty, is obligated to sell the 100 shares of stock at the strike price, irrespective of the current market price. You can also sell the call option before it expires to lock in a profit if the value rises above your purchase price.
If the stock remains below the strike price by the expiration date, the option becomes worthless, and you lose the premium paid. However, you can sell the contract before it expires at its market value, which could help in recouping some losses if the stock price hasn’t moved as expected.
In-the-money call options
When the current stock price is above the strike price, the call option is considered in the money (ITM). ITM calls have intrinsic or real value because the buyer can exercise the option to purchase shares at a price lower than the current market value. For example, if a call option has a strike price of $50 and the stock is trading at $55, the option is $5 in the money.
Out-of-the-money call options
When the current stock price is below the strike price, the call option is considered out of the money (OTM). OTM calls have no intrinsic value because exercising the option would mean buying shares at a higher price than the current market value. For example, if a call option has a strike price of $50 and the stock is trading at $45, the option is $5 out of the money.
The value of both ITM and OTM options can change as the stock price moves and time passes.
Key characteristics of call options include:
Strike price
The price at which you can buy the underlying asset.
Expiration date
The last date by which the option can be exercised.
Premium
The price you’d pay the seller for the options contract.
![Long call out-the-money and in-the-money profit and loss chart](http://a.c-dn.net/c/content/dam/igcom-websites/en_GB/images/cluster/2024/08/16/1871295_tasty_igcom_3A_images_Long call.png/jcr:content/renditions/original-size.webp)
![Short call out-the-money and in-the-money profit and loss chart](http://a.c-dn.net/c/content/dam/igcom-websites/en_GB/images/cluster/2024/08/16/1871295_tasty_igcom_3A images_Short call.png/jcr:content/renditions/original-size.webp)
How do call options work?
Suppose you believe that Amazon’s stock, currently trading at $50, will increase in value over the next month. You decide to buy a call option with a strike price of $55, expiring in 30 days, for a premium of $2 per share. Remember, each equities options contract represents 100 shares.
Scenario 1: the stock price rises to $60 by expiration
Your option is in the money because the stock price ($60) is above the strike price ($55)
You can exercise your option to buy 100 shares at $55 each and the shares will appear in your account overnight. Assuming the shares stay at $60 the next trading day, you can then sell the shares to lock in a profit
Profit: ($60 - $55) x 100 = $500, minus the premium paid ($2 x 100 = $200)
Net profit: $300
Scenario 2: the stock price rises to $60, and you sell the contract on expiration day
Your option is in the money with the stock price at $60
On expiration day, the option should be trading at its intrinsic value of $5 per share ($60 - $55)
You sell the contract before the market close for $5 x 100 shares = $500
Profit: $500 - $200 (initial premium paid) = $300
Net profit: $300 (same as Scenario 1, assuming no transaction costs)
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
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:
Open a US options and futures account by filling in a form about your trading knowledge
Once we’ve verified your details, fund your account with the amount you wish to trade
Choose your option by selecting the underlying asset, strike price, expiration date and number of contracts
Place your order to buy the call option
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:
Allow the option to expire worthless if it’s OTM. This will result in a loss limited to the initial premium paid
Sell the option before expiration, whether it’s OTM or ITM, potentially at a profit or to minimise losses
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:
Open a US options and futures margin account by completing a brief form about your trading knowledge
Once we’ve verified your details, fund your account with the amount you plan to trade
Select an underlying you have a bearish view on, an expiration date and a strike price, and decide how many contracts to sell
Place your order to sell (short) the call option and collect the premium
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.
How implied volatility affects call option values
Some traders prefer to buy calls on underlyings with low implied volatility (IV) and/or low IV rank. This is because the debit paid (the price paid for the option) will be less for underlyings with a low IV rank compared to a high IV rank. As IV increases, the market expects a greater degree of movement in the underlying. Consequently, options sellers demand a higher premium because underlyings with high IV are perceived to have a greater potential for large price moves.
Calls vs puts: what's the difference?
Understanding the differences between calls and puts is crucial for options trading. Here are the key distinctions:
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FAQs
How can I profit from buying a call option?
You can profit from buying a call option if the underlying asset’s price rises above the strike price by enough to offset the premium you paid. You can either sell the option at a higher price or exercise the option if you have sufficient account equity to buy shares at a lower price than the market value.
What's the difference between buying and selling a call option?
Buying a call option (going long) means you’re bullish and you expect the underlying asset’s price to rise. Selling a call option (going short) means you’re bearish to neutral and you expect the asset’s price to stay below the strike price.
What happens if my call option expires out of the money?
If your call option expires out of the money (ie underlying asset’s price below the strike price), it becomes worthless. As a buyer, you lose the premium paid. As a seller, you realise the premium as profit.
Should I exercise my call option or sell it before expiration?
Generally, it’s more profitable to sell the option before expiration rather than exercise it, as doing so will enable you to retain any remaining extrinsic value. However, the best choice depends on factors like the underlying asset’s current price, time left until expiration and your trading goals. Also, only accounts with sufficient funds may exercise their long calls.
Why would I sell a call option?
You might sell a call option if you believe the underlying asset’s price will remain stable or decrease. By selling, you collect a premium upfront, which becomes your profit if the option expires worthless. It can be used as a standalone strategy (naked call) or to generate a profit from stocks you own (covered call). Selling calls can also be part of more complex strategies like options spreads.
Unlike long calls, profits are capped with short calls since the most you can make is the premium collected if the option expires out of the money and worthless. However, unlike with long calls, short call sellers may benefit over time due to time decay, enabling them to potentially close the short call for less than the credit received.