Intrinsic value = max(underlying price − strike price, 0); Premium = intrinsic value + time value; Buyer's breakeven at expiry = strike price + premium paid per share
What it is
A call option is a contract between two parties. The buyer pays a price called the premium and in exchange gets the right to buy the underlying asset (commonly 100 shares of a stock per listed contract) at a fixed price, called the strike price, up to the expiration date. The buyer is never forced to do so — if buying at the strike is unattractive, the option is left to expire and the premium is gone. The seller, or writer, receives the premium and takes on the matching obligation: if the option is exercised and the writer is assigned, the shares must be delivered at the strike price, whatever the market price happens to be. Exercise timing depends on the contract style: listed stock options in Canada and the US are typically American-style, exercisable any time up to expiry, while some contracts, notably index options, are European-style and exercisable only at expiry.
Why it matters
A call is the clearest example of an asymmetric contract. For the buyer, the most that can be lost is the premium paid — but a rising stock is not the same as a gain. Because the premium is paid up front, the underlying has to finish above the strike plus the premium for the buyer to be ahead at expiry; between the strike and that breakeven the option still ends at a loss. For the writer the arrangement is reversed: the most that can be gained is the premium, while the potential loss on a call written without owning the shares is theoretically unlimited, because there is no ceiling on how high a stock price can go. Calls also show that an option's value depends on time remaining and expected movement, not direction alone.
How it's calculated
A call's price is set by supply and demand on an options exchange, quoted per share, so a 100-share contract costs 100 times the quote. The premium splits in two. Intrinsic value is what the option is worth if exercised now: underlying price minus strike, floored at zero. The rest is time value, reflecting time to expiry and expected movement. Models like Black-Scholes estimate a theoretical price from underlying price, strike, time, rates, dividends and volatility. Note the direction on that last one: implied volatility is not an outside input, it is derived from the option's observed market price by running the model backwards.
Cross-border note. Listed equity options use 100-share contracts in both countries, but venues and clearing differ. Options on TSX-listed shares trade on the Montreal Exchange, clear through the Canadian Derivatives Clearing Corporation, and are quoted in Canadian dollars; US-listed options clear through the Options Clearing Corporation in US dollars. An interlisted stock can have two separate, non-interchangeable chains.
FAQ
If the stock rises above the strike, does the call buyer make money?
Not necessarily. The premium is paid up front, so at expiry the option is worth the underlying price minus the strike, and if that is less than the premium paid the position is still down. The buyer is only ahead above strike plus premium — the breakeven. And if the option finishes at or below the strike, it expires with no value at all and the premium is lost in full. That total loss is the buyer's maximum: there is no further obligation and no margin call.
Is writing a call against shares I own a way to earn safe income?
No. Writing a call against shares already owned (a covered call) does bring in a premium, but that premium is neither free nor assured. In exchange, any gain above the strike is given up, because the shares can be called away at that price. The full downside of owning the shares also remains: the premium offsets a fall only up to the amount received, and no further. The premium is compensation for taking on a real obligation, not a fee for nothing.
Why does a call lose value even when the stock price hasn't moved?
Because part of the premium is time value, and time value erodes as expiration approaches. That erosion is called theta decay, and it is not a steady drip: it is slow when expiry is distant and accelerates in the final weeks and days, when less time remains for the underlying to move. A call can also lose value if expected movement — implied volatility — falls, with the stock unchanged.