Call options are a contracts that give the call option buyer the right, but not the obligation, to buy a stock/bond/commodity or any other asset/instrument at a specified price within a specific time period. The specified price is known as the strike price and the specified time is known as expiration or time to maturity.

The stock/bond/commodity is the underlying asset. A call option buyer profits when the underlying asset increases in price. Call options may be purchased for speculation, or sold for income purposes. They may also be combined for use in spread or combination strategies.

The market price of the call option is called the premium. It is the price paid for the rights provided by the call option. If at the maturity date the underlying asset is below the strike price, the call buyer loses the premium paid. This is the maximum loss option buyer can suffer from. If the underlying’s price is above the strike price at expiry, the profit is the current stock price, minus the strike price and the premium. This is then multiplied by how many shares the option buyer controls.

In example, if A Stock is trading at $210 at expiry, the strike price is $200, and the options cost the buyer $5, the profit is $210 – ($200 +$5) = $5. If the buyer bought one contract that equates to $1000 ($5 x 1000 shares), or $1,600 if they bought two contracts ($8 x 200). If at expiry Apple is below $100, then the option buyer loses $200 ($2 x 100 shares) for each contract they bought.