You buy with a strike price of $400 that expires in one month. This contract costs you a "premium" of $6.00 per share, or $600 total (since one contract covers 100 shares). Your Risk: The most you can lose is that $600 premium.
Your contract is now worth $2,000 ($20 x 100 shares).
Check out these guides to see these concepts in action and avoid common beginner traps: how to buy calls
Theoretically unlimited if the stock price skyrockets. The "Aha!" Moment: Leverage in Action
If the earnings report had been a dud and the stock stayed at or dropped, your option would have expired worthless . Unlike a stock owner who can wait for a recovery, an option buyer has a "ticking clock"—once that expiration date hits, your $600 is gone forever. You buy with a strike price of $400
After subtracting your initial $600 investment, you’ve made a $1,400 profit .
Imagine you’re watching a company like Netflix, which is trading at . You’re convinced their upcoming earnings report is going to be a blockbuster. Instead of buying 100 shares for a steep $39,000 , you decide to "buy a call". The Setup: Buying the "Right" Your contract is now worth $2,000 ($20 x 100 shares)
In this scenario, while a regular shareholder saw a ($390 to $420), your call option delivered a 233% return on your $600. The Reality Check: What if it Fails?