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Call Options

A call option gives the holder the right to buy a stock at a specified price, providing leveraged upside exposure to price increases.

A call option is a contract that gives the buyer the right, but not the obligation, to buy 100 shares of the underlying stock at the strike price before expiration. Call buyers profit when the stock price rises above the strike price plus the premium paid. Call sellers (writers) collect premium and profit when the stock stays below the strike price, but face substantial risk if the stock rallies sharply.

NVDA is trading at $800. You buy a $850 call expiring in 45 days for $15.00 ($1,500 total). If NVDA rallies to $950, the call is worth $100 ($10,000), giving you an $85 profit per share ($8,500). If NVDA stays below $850, the call expires worthless and you lose the $1,500 premium. The breakeven is $865 ($850 + $15). Call options gain value as the stock rises, as volatility increases, and as time to expiration extends.

Call Buying Strategies

Call buying offers leveraged upside with defined risk. A common strategy is buying out-of-the-money calls before earnings or catalysts. For example, if you expect AAPL to beat earnings and rally from $190 to $210, buying a $200 call instead of buying 100 shares gives you leveraged exposure with capped downside. Another strategy is the LEAPS call, buying long-term (1-2 year) calls as a stock replacement strategy. LEAPS calls cost less than buying shares while providing similar upside exposure, freeing up capital for other investments.

Call Selling Strategies

Selling calls generates income through premium collection. Covered calls (selling calls against shares you own) are the most common approach. Naked call selling (selling calls without owning shares) carries unlimited theoretical risk and requires high margin approval. A bear call spread (selling a lower strike call and buying a higher strike call) limits risk while maintaining a bearish or neutral outlook. Many traders sell weekly calls on high-IV stocks to capture rapid theta decay, though this requires active management.

FAQs

What is leverage in call options?

Call options provide leverage because you control 100 shares for a fraction of the cost. If NVDA rises 10% from $800 to $880, a $850 call might double or triple in value, representing a 100-300% return on the option premium.

Can I exercise a call option early?

American-style calls can be exercised early, but it's rarely optimal because you lose any remaining time value. Early exercise typically occurs just before an ex-dividend date when the dividend exceeds the remaining time value of the call.

What happens if a call expires in-the-money?

If the stock is above the strike at expiration, the call is automatically exercised. You buy 100 shares at the strike price, and your broker credits or debits your account accordingly. Ensure you have sufficient funds if you don't want to hold the shares.

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