A call option is a contract that grants the buyer (long call) the right — but not the obligation — to buy 100 shares of an underlying security at the strike (exercise) price on or before the expiration date. The buyer pays a premium for this right. The seller (short call or call writer) receives the premium and is obligated to sell the shares at the strike price if the buyer exercises.
A call is in the money (ITM) when the underlying stock price is above the strike price; at the money (ATM) when equal to the strike; and out of the money (OTM) when the stock is below the strike. The option's intrinsic value is the ITM amount; time value is the premium above intrinsic value. Time value decays as expiration approaches (theta decay).
The maximum profit for a long call is theoretically unlimited (stock can rise infinitely); maximum loss is the premium paid. For a short call (uncovered/naked), maximum loss is theoretically unlimited — this is why naked call writing requires significant margin. A covered call (long stock + short call) generates premium income with the trade-off of capping upside at the strike price.
Options are standardized contracts issued by the Options Clearing Corporation (OCC), which acts as counterparty to all listed options. Listed equity options generally expire on the third Friday of the expiration month.
> Exam tip: On the Series 7, master the four basic option positions (long call, short call, long put, short put) and their maximum gain, maximum loss, and break-even calculations. For a long call: break-even = strike + premium; max gain = unlimited; max loss = premium. Know that the OCC guarantees performance, not SIPC. Options are time-wasting assets — long option positions lose time value every day.