Let's imagine you have a strong feeling a particular stock is about to move higher. You can either purchase the stock, or purchase 'the right to purchase the stock', otherwise known as a call option. Buying a call is similar to the concept of leasing.

Like a lease, a call gives you the benefits of owning a stock, yet requires less capital than actually purchasing the stock. Just as a lease has a fixed term, a call has a limited term and an expiration date. Let's look at an example option.

Instead of purchasing the stock you could purchase a MSFT "call option" with a strike price of 30 and an expiration 1 month in the future. This transaction will enable you to participate in the upside movement of the stock while minimizing the downside risk of purchasing stock. If the stock price increases, the option gives you two choices: Many investors choose to sell because it avoids the substantial cash outlay involved in exercising your call option.

Compare this to selling the options: The scenario described above is a great example of the leverage that options provide. Just look at the returns on a percentage basis. Now, let's see what happens when the stock drops.

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When you compare the limited downside and the unlimited upside potential of call options, it easy to see why they are such an attractive investment for bullish investors. Didn't find what you needed? Content and tools are provided for educational and informational purposes only.

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The Downside of Buying Call Options - Online Trading Concepts

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System response and access times that may vary due to market conditions, system performance, volume and other factors. Options and futures involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options and Risk Disclosure Statement for Futures and Options on our website, prior to applying for an account, also available by calling An investor should understand these and additional risks before trading.

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Multiple leg options strategies will involve multiple commissions. Member SIPC "Schwab" and optionsXpress, Inc. Deposit and lending products and services are offered by Charles Schwab Bank, Member FDIC and an Equal Housing Lender "Schwab Bank". Example Let's look at an example option.