Call options are financial contracts that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity or other asset or instrument at a specified price within a specific time period. The stock, bond, or commodity is called the underlying asset. A call buyer profits when the underlying asset increases in price. When an option to buy stock is purchased, the option contract gives the buyer the right to purchase 100 shares at the strike price.
For example, if the buyer purchases a Tesla ($TSLA) option at a $350 strike price while Tesla is worth $345 per share, and the value of Tesla goes up to $360 before the option expires, the buyer of the option can either purchase 100 shares of Tesla for $350 each and then sell them for $360 each for a profit of $1,000 ($10 change in strike price x 100 shares), or sell the option for the increase in value before it expires or is exercised.
If the buyer does not have enough capital in their brokerage account to purchase 100 shares of Tesla, the option trade should be closed before expiration.
What if the option trader wants to short Tesla, or thinks there’s a chance the stock will drop instead of going up? See Put Option.