65-Day Academy · Day 49 · Options: Foundations
The Call — Leveraged Upside With Defined Cost
The contract
A call gives the BUYER the RIGHT (not obligation) to buy 100 shares at the STRIKE price any time before EXPIRATION. The buyer pays the PREMIUM for that right; the SELLER collects the premium and takes on the obligation to deliver if exercised. One standard contract = 100 shares.
The payoff shape
Buy a $100-strike call for $3: max loss = $300 (the premium), max gain = unlimited above $103 (strike + premium = breakeven). The call is a defined-cost leveraged bet on upside: small premium controls 100 shares ($10,000 notional for $300) — leverage that cuts both ways, since a flat or falling stock loses 100% of the premium.
When calls make sense
As a defined-risk substitute for a small stock position (risk $300 to control $10,000 — but with an EXPIRATION clock stock doesn't have), or as portfolio insurance logic. When they fail: time (day 51) and the statistical reality that most options expire worthless — the premium seller collects a "rent" the buyer pays for possibility.
What you'll practise
You buy one $50-strike call for $2.00 when the stock is $48. What is your max loss, and at what price do you break even at expiration?
15 XP in the app · introductory
Sources
- Options EducationCBOE
- Call OptionInvestopedia
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All lessons are for educational purposes only and are not individualized financial advice, a recommendation, or a solicitation to buy or sell any security. Options involve substantial risk and are not suitable for every investor.