Call options grant buyers the right to purchase shares at a fixed strike price, with profits tied to stock gains above the premium paid.
A call option contract allows the buyer to pay an upfront premium for the right to purchase shares at a predetermined strike price before expiration. The seller, or writer, collects this premium but assumes the obligation to deliver shares if the buyer exercises the option.
Standard stock call options cover 100 shares per contract, meaning a $5-per-share premium costs the buyer $500. The buyer profits only if the stock price exceeds the strike price by more than the premium paid. If the stock fails to rise sufficiently, the buyer’s loss is limited to the premium.
Sellers benefit if the stock remains at or below the strike price, allowing them to retain the full premium without delivering shares.