A call option is a contract that gives its buyer the right, but not the obligation, to buy a specific asset at a predetermined price (called the strike price) on or before a set date (the expiry date). The underlying asset could be a stock, bond, commodityor any other tradable instrument. The buyer pays a fee known as the premium for this right. If the asset price goes above the strike price before expiry, the buyer can exercise the option and buy at the lower strike price, then sell at market price for a profit. If the price stays below the strike price, the buyer can let the option expire, losing only the premium paid.

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Key Terms to Know

Strike Price: The price at which you have the right to buy the asset.
Expiry Date: The last day you can exercise the option.
Premium: The upfront fee paid to purchase the option.
Underlying Asset: The stock, bond, commodity or other asset that the option is based on.
In the Money (ITM): When the market price is above the strike price at expiry (profitable for call buyers).
Out of the Money (OTM): When the market price is below the strike price at expiry (option expires worthless).

How Call Options Work: An Example

Imagine you want to buy a house priced at ₹10,00,000 but you won’t have the cash for another three months. You believe a new metro line might raise property prices soon, so you negotiate an agreement with the owner:

You pay ₹30,000 today for the right (but not the obligation) to buy the house for ₹10,00,000 any time within the next three months.
If the house’s market price rises to ₹30,00,000 because the metro line gets built, you exercise your option. You buy at ₹10,00,000, sell for ₹30,00,000 and pocket the difference (minus the ₹30,000 fee).
If the market price falls to ₹5,00,000, you walk away from the deal. You lose only the ₹30,000 premium, which is far less than buying at ₹10,00,000 and watching the value drop.

This is how call options work in the stock market too: you pay a premium to control a large number of shares without committing the full purchase price.

Long vs. Short Call Options

There are two sides to every option contract: someone buys (long) and someone sells (short). The table below compares a long call and a short call:

Feature

Long Call (Buyer)

Short Call (Seller)

Rights/Obligations

Right to buy the asset at the strike price.

Obligation to sell the asset if the buyer exercises.

Expectation

Expects the price of the asset to rise.

Expects the price to stay the same or fall.

Maximum Profit

Unlimited (price can rise indefinitely).

Limited to the premium received.

Maximum Loss

Limited to the premium paid.

Potentially unlimited (especially for uncovered/naked calls).

Cash Flow

Pays premium upfront.

Receives premium upfront.

Best Used When

You want leveraged exposure to upside with limited risk.

You want to generate income and believe price won’t rise significantly.

Call vs. Put Options

Call options are often discussed alongside put options. The table below outlines their differences:

Aspect

Call Option

Put Option

Right Gives

Right to buy an asset at the strike price.

Right to sell an asset at the strike price.

Investors Expect

Price of the asset will rise.

Price of the asset will fall.

Profit Potential

Unlimited (no ceiling on how high prices can go).

Limited (price can fall only to zero).

Who Uses It?

Investors bullish on the asset; speculators; hedgers.

Investors bearish on the asset; hedgers.

Example Use Case

Buy a call on a stock you expect to jump after earnings.

Buy a put to protect against a potential decline in the stock you own.

When Should You Buy a Call Option?

Buying a call (taking a long position) makes sense when:

You expect the asset’s price to rise significantly before expiry.
You want to invest with leverage—a smaller upfront cost for potentially larger gains.
You want to limit your risk to the premium paid.
You prefer flexibility: you can exercise, sell the option early, or let it expire.

When Should You Sell a Call Option?

Selling a call (taking a short position) is useful when:

You expect the asset’s price to stay flat or fall.
You want to generate income from the premium.
You own the underlying asset and sell a covered call to earn extra income—if the price rises above the strike, you’re willing to sell your shares at that price.
You understand the risks: losses can be unlimited if the price rises sharply, especially with uncovered or naked calls.

Covered vs. Naked Call

Covered Call: You sell a call option while owning the underlying asset. Your risk is limited because you already hold the shares.
Naked Call: You sell a call option without owning the underlying asset. If the price rises, you may have to buy the asset at market price to deliver it at the lower strike price- risk is high.

Advantages of Call Options

Leverage: Gain control of more shares for less money than buying outright.
Limited Risk for Buyers: The maximum possible loss is the premium paid.
Flexible Strategies: Can be used for speculation, hedging existing positions, or generating income (covered calls).
Profit Potential: Unlimited upside if the asset’s price rises significantly.

Disadvantages of Call Options

Time Decay: Options lose value as they approach expiry, even if the asset price doesn’t move.
Complexity: Options involve more variables (strike price, expiry, volatility) than buying shares.
Potentially Unlimited Losses for Sellers: If the price rises dramatically, call sellers (especially naked sellers) face high losses.
Not Always Exercised: Even if the price moves favourably, you must act before expiry; otherwise, the opportunity is lost.

Conclusion

Call options offer a flexible way to speculate on price increases, hedge existing positions or generate income. By paying a premium, the buyer gains the right to buy an asset at a fixed price within a certain timeframe, with losses limited to the premium. Sellers, on the other hand, receive the premium but face potentially unlimited losses. Understanding the differences between long and short calls, calls and puts, and covered versus naked positions is crucial. For investors expecting a price rise, buying a call provides leverage and limited risk; for those expecting a price drop or stable market, selling a call can generate income. As with all investment strategies, education and risk management are key.

Frequently Asked Questions (FAQs)

What is a strike price?

It’s the price at which the option holder can buy the underlying asset.

Do I have to hold the option until expiration?

No. Buyers can sell their call options at any time before expiry or exercise them if conditions are right.

How is call option profit calculated?

Profit for a buyer is the difference between the market price and the strike price, minus the premium paid. If the market price doesn’t exceed the strike price plus the premium, the option isn’t profitable.

Can I lose more than I paid for a call option?

As a buyer, no—you can only lose the premium. As a seller, yes, if you sell a naked call.

What’s the difference between European and American call options?

American options can be exercised at any time up to expiry; European options can be exercised only on the expiry date.

Are call options suitable for beginners?

Call options can be useful but involve complexities and risks. Beginners should learn the basics and possibly practice on a simulator before trading with real money.

How do weekly and monthly call options differ?

Monthly call options are the standard contracts that expire on a set day each month. Weekly call options expire every week and offer more frequent trading opportunities but also more rapid time decay.

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