So someone said “options trading” and you’re either curious, confused, or convinced it’s only for math geniuses. Let’s put that to rest.
In this article we’re covering one thing: what it means to buy a call option. We’ll start with a simple analogy, then walk through a real stock example.
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What does it mean to buy an option?
Buying an option means you’re paying a small fee now for the right to make a move on a stock later.
You’re not buying the stock itself. In other words, you are buying the right to buy or sell it at a specific price, before a specific date.
There are two types of options you can buy:
Calls: you think the stock will go up.
Puts: you think the stock will go down.
Today, we’re focusing on buying calls.
Let’s start simple
An apple costs $2 at the store today.
Your friend offers you a deal: pay $1 now, and you can buy an apple for $2 anytime this week no matter what happens to the price.
You think apples are about to get more expensive, so you pay the $1.
Scenario 1: Apple price jumps to $5
- You use your coupon to buy the apple for $2.
- You sell it to someone else for $5.
- You made a $3 gain, minus the $1 you paid for the coupon.
- So your real profit = $2 from a $1 coupon = 200% return.
Scenario 2: Apple price stays at $2 or drops
- Your coupon is useless since you can already buy apples at $2 or less.
- You lose the $1 you paid. That’s your maximum loss.
That $1 coupon? In options, it’s called the premium. The $2 price you locked in? That’s the strike price. And the end of the week? That’s the expiration date.
Now let’s talk Tesla
Same idea. Let’s say:
- Tesla is trading at $250 today.
- You buy a $260 call option for $200.
- The option expires in 2 weeks.
Quick term check:
It’s important to note: 1 option contract = 100 shares.
In this case, the premium on Sarwa will show as $2 ($2 per share that is). To calculate your premium: $2 × 100 = $200 total. Your breakeven is the strike price (price you’re hoping TSLA will reach) + the premium you paid: $260 + $2 = $262 per share. Tesla needs to go above $262 for you to actually profit.
Scenario 1: Tesla jumps to $280
- You “sell to close” (you close your position) your options contract at $280
- That’s $20 gain per share × 100 shares = $2,000
- Minus your $200 premium
- Profit = $1,800.
To put that in perspective: if you’d bought 100 shares of Tesla at $250, you’d have spent $25,000 and made $3,000: a 12% return. The option gave you a much larger return relative to what you risked, with far less capital. That’s what we call leverage.
Scenario 2: Tesla stays at $250 or drops
- Your option is worthless. Why buy at $260 when it’s cheaper on the market?
- It expires. Nobody wants it.
You lose the $200 you paid. That’s your maximum loss.
TL;DR: Buying a Call
| Option | What it is | Outlook | Max profit | Max loss | Return depends on |
|---|---|---|---|---|---|
| Call Option | Right to buy a stock at a certain price selected by you (aka strike price) | You think the stock will go up | If stock rises well above strike price, your profit is potentially unlimited | Premium paid | How far the stock price goes above your strike price minus premium |
Takeaways
- A call option is like a coupon that might become super valuable.
- You pay a little money now hoping you can use it later to make a lot more.
- If the stock price goes up = you make a profit
- If it doesn’t = your maximum loss is the money you paid for the premium