What is a call (in markets)
– A call most commonly refers to a call option: a contract that gives its buyer the right, but not the obligation, to buy a specific underlying asset at a predetermined price (the strike price) before or at a stated expiration date. The contract is purchased for a cost called the premium.
– “Call” can also mean other things in finance: a company’s earnings call or the issuer’s right to redeem (call back) bonds. This explainer focuses on call options.
Key terms (defined)
– Call option: contract giving the holder the right to buy the underlying at the strike price within a set time.
– Strike price: the agreed price at which the holder may buy the underlying.
– Premium: the price paid to buy the option.
– Expiration date: the last date the option can be exercised.
– Writer (seller): the counterparty who sells the option and must fulfill the contract if it’s exercised.
– In-the-money (ITM): for a call, when underlying market price > strike price.
– Out-of-the-money (OTM): for a call, when underlying market price 105, seller’s loss per share = (Spot_T − 105) − 2.
Examples:
– Spot_T = $110: Loss per share = (110 − 105) − 2 = 3 → Loss per contract = $300 − but seller had received $200, so net = −$300? (Check: premium − intrinsic = 2 − 5 = −3 → −$300) Correct: net loss = $300.
– Spot_T = $200: Net loss per share = 2 − 95 = −93 → −$9,300 per contract (large, potentially unlimited).
Notes:
– Naked-call seller faces theoretically unlimited loss as Spot_T can rise without bound.
– Margin and assignment risk apply; brokers can require additional collateral or force liquidation.
Worked numeric example — covered call (buy 100 shares + sell 1 call)
– Buy 100 shares at $100 = $10,000 outlay.
– Sell 1 call strike 105, receive $200 premium (reduces net cost basis).
– Net cost basis per share = (100 × 100 − 200) / 100 = $98 per share.
– Outcomes at expiration:
– If Spot_T ≥ 105: stock gets called away; proceeds = 105 × 100 = $10,500; plus keep premium $200 → total = $10,700 → net profit = $700 = 7% on $10,000 initial stock cost, or ~7.14% on $9,800 net basis.
– If Spot_T < 105: you keep premium and the shares; downside limited by stock decline minus premium.
Notes:
– Covered call caps upside at the strike plus premium but provides income and partial downside protection (premium amount).
– No unlimited loss protection — stock can fall substantially.
Quick checklist before entering a call trade
– Liquidity: check volume and open interest to ensure tight bid-ask spreads.
– Time to expiration: longer-dated options cost more (time value).
– Implied volatility (IV): compare IV to historical volatility; high IV raises premiums.
– Break-even and required move: calculate Strike + Premium to know the required price at expiration.
– Position sizing: limit premium risk to an amount you can afford to lose.
– Assignment risk (for sellers): understand early assignment on American-style options, especially near dividends.
– Commissions and fees: include these in profitability calculations.
Practical exit and management steps
– Monitor delta (approximate change in option price per $1 move in underlying) to assess responsiveness.
– Consider closing (buying back a short call or selling a long call) before expiration to avoid assignment or to capture remaining time value.
– Rolling: close current option and open a new one with a later expiration or different strike to extend exposure.
– If long and deeply ITM (in the money), evaluate exercising vs selling the contract (often selling preserves time value and avoids paying strike cash).
Key Greeks (brief)
– Delta: sensitivity of option price to $1 move in underlying (call delta between 0 and 1).
– Theta: time decay; options lose value as expiration approaches, all else equal.
– Vega: sensitivity to changes in implied volatility; higher IV increases option prices.
– Gamma: rate of change of delta; important for large moves.
Assumptions and caveats
– Examples ignore transaction costs, taxes, margin interest, and dividends unless stated.
– Real-world fills may differ from quoted premiums due to bid-ask spreads.
– Options pricing involves stochastic models (e.g., Black–Scholes) that assume lognormal returns and continuous hedging; deviations occur in practice.
Further reading (reputable sources)
Further reading (reputable sources)
– Investopedia — Call Option (overview, examples, Greeks): https://www.investopedia.com/terms/c/call.asp
– CBOE (Chicago Board Options Exchange) — Learn Center (option mechanics, strategies, volatility concepts): https://www.cboe.com/learncenter/
– Options Industry Council (OIC) — Education materials and calculators for retail traders (strategy guides, risk explanations): https://www.optionseducation.org/
– SEC — Investor.gov (official glossary and investor guidance on options and their risks): https://www.investor.gov/introduction-investing/investing-basics/glossary/options
– The Options Clearing Corporation (OCC) — About options and how options are cleared and guaranteed: https://www.theocc.com/Company-Information/About-Options
Educational disclaimer
This information is educational only and not individualized investment advice or a recommendation to buy or sell any security. Options involve risks (including potential loss of entire premium and margin/assignment risks); consult a licensed financial professional and review prospectuses or contract specifications before trading.