📘 Lesson 3: Call Options Explained — How to Bet on Stocks Going Up with Less Money
🧠 Core Concept
A Call Option gives you the right (but not the obligation) to buy a stock at a specific strike price on or before a certain expiration date.
You use it when you believe the stock will go up.
✅ Real Example
Let’s say:
- AAPL is trading at $100
- You buy a Call Option with:
- Strike Price: $105
- Expiration: 1 month
- Premium: $2.00 (so, $200 per contract)
If AAPL rises to $115:
- You can buy at $105, even though it’s trading at $115.
- You could then sell the stock at $115 and make a $10 profit per share.
- But you paid $2 per share, so your net profit is $8 × 100 = $800
🧮 Key Formula
Break-even price = Strike Price + Premium Paid
In our case:
- Strike: $105
- Premium: $2
→ Break-even: $107
Only above this point do you make a net profit.
📊 What Happens at Expiration?
| Stock Price at Expiration | Option Value | Outcome |
|---|---|---|
| Below $105 | $0 | Option expires worthless |
| At $107 | $2 – matches premium | Break-even |
| Above $107 | Profit grows | The higher it goes, the more you earn |
📌 Terminology Recap
| Term | Meaning |
|---|---|
| Strike Price | The fixed price you can buy the stock |
| Premium | The cost to buy the option (paid upfront) |
| Expiration | Last date the option can be used |
| ITM | In-the-money = stock > strike price |
| OTM | Out-of-the-money = stock < strike price |
💡 Why Buy Calls Instead of Stock?
- ✅ Less capital required
- ✅ Defined risk (you only lose the premium)
- ✅ Unlimited upside potential
But:
- ❌ They lose value over time (called time decay)
- ❌ You can lose 100% of your premium if the stock doesn’t move
🛠️ When to Use Call Options
| Scenario | Strategy |
|---|---|
| You expect a stock to surge soon | Buy Call Option |
| You want to control stock cheaply | Use Calls instead of stock |
| You want leverage | Use Calls with high delta |
📈 Visual: Call Option P/L Chart
- Flat line until break-even
- Then steep upward slope
- Max loss = premium paid
- Max gain = unlimited
See what a P/L Chart looks like.
✅ Quick Quiz
- What is your maximum loss when buying a call option?
- What is the break-even formula?
- If you buy a $50 call for $3, where does the stock need to go for you to profit?
🧠 Answers
- The premium paid (e.g., $300 per contract)
- Strike Price + Premium
- At least $53
Check out our Stock Options Analysis & Trading Strategies to understand how to apply your knowledge to actual stock options.