Definition
A call option gives its buyer the right, but not the obligation, to buy a set quantity of the underlying asset at the strike price on or before expiration, in return for a premium.
How it works
At expiry a call is worth something only if the underlying price is above the strike, and its payoff per unit is that excess. The buyer's break-even at expiry is the strike plus the premium, because the premium must be recovered before there is any profit.
The buyer's loss is capped at the premium, while the potential gain rises as the underlying price rises. A seller who does not own the underlying faces theoretically unlimited loss; a covered call seller owns the shares, which caps upside in exchange for premium income.
Formula / convention
Payoff per unit at expiry = max(S − K, 0); Profit per unit = Payoff − Premium; Break-even price = K + Premium (S = underlying price at expiry, K = strike); multiply per-unit amounts by the contract multiplier and number of contracts
Illustrative example
A fictional call on Sample Co has a HK$50 strike and a HK$2 premium per share and covers 1,000 shares, so the buyer pays HK$2,000. If the share closes at HK$57 at expiry, the payoff is (57 − 50) × 1,000 = HK$7,000 and the profit after premium is HK$5,000, before commissions and taxes. At HK$51 the HK$1,000 payoff still leaves a HK$1,000 loss, since break-even is HK$52.
What to watch for
A call can lose money even when the underlying rises, because at expiry the price must exceed the strike plus the premium; selling calls without owning the underlying can cause very large losses.