A call option is the right, but not the obligation, to buy an asset at a prespecified price on, or before, a prespecified date in the future. An investor can take a long or a short position in a call option.

Long Call

Consider a call option with a strike price of $105 and a premium of $3.

This diagram shows the option’s payoff as the underlying price changes for a long call position. If the stock falls below the strike price at expiration, the option expires worthless. The option buyer loses $3 and option seller gains $3. As the stock’s strike price starts increasing above $105, the payoff from the option starts increasing for the buyer. The option will breakeven when the stock price is equal to the strike price plus the option premium ($105 + $3). A call option has unlimited upside potential, but limited downside for the option buyer.

The profit/loss diagram for a long call position is summarized below:

• Maximum profit is unlimited as theoretically the stock price can keep increasing.
• Maximum loss is equal to the option premium paid.
• Breakeven point occurs when the Stock Price = Strike Price + Premium Paid
• The call option holder will exercise the option when the stock price exceeds the strike price.

Short Call

The following diagram shows the call option payoff from the seller’s perspective.

• The maximum profit is limited to the option premium received.
• Maximum loss is unlimited. The loss increases as the stock price increases.
• Breakeven point occurs when the Stock Price = Strike Price + Premium Received