What Is a Stock Call Option?
A stock call option gives the holder the right, but not the obligation, to buy 100 shares of the underlying stock at a predetermined strike price before the option expires. Investors buy call options when they expect a stock's price to increase. The call buyer pays a premium upfront for this right, and their profit potential is theoretically unlimited while their risk is limited to the premium paid.
Stock call options are one of the most fundamental building blocks of options trading. They can be used on their own for directional bets, combined with stock ownership in covered call strategies, or paired with other options in multi-leg strategies like vertical spreads and straddles. Understanding how call option profits are calculated is essential for any options trader.
One call option contract controls 100 shares of the underlying stock. If you buy one call at $4.00 per share, your total cost is $400. This leverage is what makes options attractive to many traders.
How to Calculate Call Option Profit
Calculating your profit on a call option depends on whether you are the buyer or seller. A long call buyer profits when the stock price rises above the breakeven point (strike price plus premium paid). A short call seller profits when the stock stays below the strike price at expiration, allowing them to keep the premium collected.
- 1Call breakeven = $155 + $4.00 = $159.00
- 2At target price $165, intrinsic value = $165 - $155 = $10.00 per share
- 3Net profit per share = $10.00 - $4.00 = $6.00
- 4Total profit = $6.00 × 100 × 1 = $600
- 5Total cost = $4.00 × 100 = $400
- 6ROI = $600 / $400 = 150%
Call Option Profit at Different Stock Prices
| Stock Price | Intrinsic Value | Net P/L per Share | Total P/L (1 Contract) | ROI |
|---|---|---|---|---|
| $145 | $0.00 | -$4.00 | -$400 | -100% |
| $150 | $0.00 | -$4.00 | -$400 | -100% |
| $155 | $0.00 | -$4.00 | -$400 | -100% |
| $159 | $4.00 | $0.00 | $0 | 0% |
| $162 | $7.00 | +$3.00 | +$300 | +75% |
| $165 | $10.00 | +$6.00 | +$600 | +150% |
| $170 | $15.00 | +$11.00 | +$1,100 | +275% |
In-the-Money vs. Out-of-the-Money Calls
A call option is in-the-money (ITM) when the stock price is above the strike price, at-the-money (ATM) when the stock price equals the strike price, and out-of-the-money (OTM) when the stock price is below the strike price. ITM calls cost more but have a higher probability of profit. OTM calls are cheaper and offer higher leverage but are more likely to expire worthless.
The delta of a call option tells you approximately how much the option price will change for a $1 move in the stock. ATM calls typically have a delta near 0.50, meaning the option gains about $0.50 for every $1 the stock rises. Deep ITM calls have deltas approaching 1.00, while far OTM calls have deltas near 0. Delta is also sometimes used as a rough approximation for the probability that the option will expire in-the-money.
Choosing the Right Strike Price for Your Call
- High conviction trades: Buy slightly OTM calls (5-10% above current price) for maximum leverage
- Conservative approach: Buy ITM calls with delta 0.60-0.70 for higher probability of profit
- Income generation: Sell OTM calls with delta 0.20-0.30 against shares you own (covered calls)
- Speculation on earnings: Consider ATM straddles instead of directional calls when unsure of direction
- Long-term bullish outlook: Buy deep ITM LEAPS calls as a stock replacement strategy
Common Mistakes When Trading Stock Calls
Mistakes to Avoid
Before buying a call option, calculate the percentage move the stock needs to make for you to break even. If the stock needs to move 8% in 30 days just to break even, ask yourself: is that realistic based on the stock's historical volatility?