Calls
The right to buy. The kind of option people mean when they say they think something is going up.
The bicycle promise in the last lesson was a call. A call option is the right to buy something at a fixed price, on or before a fixed date.
The shape of the outcome
Suppose a share trades at $100. You buy a call with a strike price of $110, expiring in three months, and it costs you $3.
Three months later, one of three things is true. These figures are invented to show the shape.
| Share price at expiry | Is the right useful? | Value of the option | Your result |
|---|---|---|---|
| $90 | No — you can buy cheaper | $0 | −$3 |
| $110 | No better than the market | $0 | −$3 |
| $113 | Yes, by $3 | $3 | $0 — you break even |
| $130 | Yes, by $20 | $20 | +$17 |
The break-even is higher than you think
With a $110 strike and $3 paid, the share has to reach $113 before you make a penny. Being right about the direction is not enough — the move has to be big enough to cover the premium, and fast enough to happen before expiry.
This is the single most common way beginners lose money on calls. The share goes up, they were right, and they still lost, because it went up $2 when they needed $3, or it went up next month instead of this one.
Why buy a call instead of the share?
- Less money at risk. $3 instead of $100 buys exposure to the same move.
- A known maximum loss. You cannot lose more than the premium.
- Leverage. A small price move can be a large percentage change in the option's value — in both directions.
And why not to
Because the share can do nothing for three months and you lose everything, whereas an owner of the share would simply still own the share. An option has a deadline. Ownership does not.
To profit you need the price to move the right way, by more than the premium, before a fixed date. Buying the share requires only the first of those three. Each additional condition is another way to be wrong.