Learn the stock market › Options › Lesson 3 of 9
What is a call option?
Change the example
An example with round prices that you can change. Pick the strike, the premium and the price at expiry. You can also switch to the writer's side.
With the stock at $120 at expiry the result is +$15 per share, +$1,500 for a contract of 100 shares. Break-even is $105. The most you can lose: $5.
The ring marks the break-even price, and the filled dot marks the price you chose.
How to read the chart
Below the strike the line is flat. Buying the stock at the strike does not pay there, and the buyer has lost the premium however far the stock has fallen.
Above the strike the line rises dollar for dollar with the stock. A buyer's gain has no upper limit, because a stock has none.
The same deal from two sides
One contract of 100 shares, a $100 strike and a $5 premium. What the buyer gains the writer loses, and the other way round.
| Price at expiry | Option's value | Buyer | Writer |
|---|---|---|---|
| $70 | $0 | −$500 | +$500 |
| $90 | $0 | −$500 | +$500 |
| $100 | $0 | −$500 | +$500 |
| $105 | $5 | $0 | $0 |
| $110 | $10 | +$500 | −$500 |
| $130 | $30 | +$2,500 | −$2,500 |
The table shows the position at expiry. Before expiry the option is worth more than the gap between the price and the strike, because there is time left.
Writing a call without owning the stock has no limit on the loss. That is explained in the lesson on losses.
Test yourself
Strike $100, premium $5. The stock is at $103 at expiry. What is the buyer's result per share?