Eli5: How do stock calls work?
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A call option, is an options to buy a stock at a preset price.
Let’s say Acme Corporation is currently trading at $9 a share.
I sell a call option expiring in 1 month, for 100 shares at $10 a share. The buyer of the option pays me $.10 a share for the contract. So I get 10 dollars for selling the contract.
In one month the stock is trading at $10.50 a share, so the buyer of the option exercises their right and buys 100 share at $10 a share. This option is said to be in the money. Now if I had already owned 100 shares that I had bought at $8 a share, this would have been a covered call and I would have profited $200 in the trade. If I did not have shares, this would have been called a naked call, and I would have to buy 100 shares at $10.50, and sell them at $10. I would have lost $50.
Now lets saw in one month the stock is trading at $9.75 a share. This option would be called out of the money, and would have expired worthless. No buyer is going to pay $10 a share when they can buy it for $9.75 on the open market. However I as the sell of the option profited $10 from the optional premium I collected.
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