Call options are one of the two major types of options, and investors have two ways to use them: either selling them or buying them. Buying, or going long, calls offers tremendous potential gains, and it tends to be what people think of when they think of options. In contrast, going short calls offers a cash payment upfront but no further gain — and in fact, the potential for significant loss.

Here’s how short calls and long calls work and the key differences between the two.

What is a long call?

A long call is the purchase of a call option. A long call offers the right, but not the obligation, to purchase a stock (or other asset) at a specific price by a specific date, at which point the option expires. The call buyer pays an amount of money called a premium to the seller for this right.

The payoff for going long calls is theoretically infinite. If the stock keeps rising until expiration, the value of the option keeps climbing, too. In fact, the long call climbs faster in percentage terms than the stock price does. This uncapped potential is why going long is attractive to traders.

The drawback of going long calls is that the option has the very real possibility of ultimately being worthless. If the long call is not “in the money” — meaning above the strike price, where it has some value — then it expires worthless and the trader loses the full cost of the long call.

When it’s used: A trader would generally go long calls when the underlying stock is expected to rise, ideally significantly, before expiration.

Example of a long call

Let’s say that stock DEF is trading at $20 per share. You can buy a call on the stock with a $20 strike price for $2, and the option expires in six months. One long call contract costs $200, or $2 * 1 contract * 100 shares.

Here’s the trader’s profit on the long call at expiration.

Above the strike price, the value of the option at expiration rises $100 for every $1 increase in the stock. For example, as the stock goes from $23 to $24 — an increase of 4.3 percent — the profit on the option rises from $100 to $200, a gain of 100 percent. The stock could continue to rise, sending the price of the long call much higher for a relatively small gain in the stock price.

In this example, the trader loses money between a stock price of $20 and $22. The trader paid $2 for the option and so breaks even at a stock price of $22 (the stock price plus the option’s cost). So the option may be in the money at expiration, but the trader may still have lost overall.

Finally, if the stock finishes below $20 at the option’s expiration, it expires worthless and the trader loses the entire investment in the long call.

The best brokers for options trading offer tools that help traders analyze options effectively.

What is a short call?

A short call is the reverse strategy to the long call. Every long call that’s purchased is also sold or “written” by another trader who thinks the option looks attractively priced.

A short call is the sale of a call option. With a short call, the trader promises to sell the stock at a specific price by a specific date to the buyer of that call. For this right, the call seller receives the premium from the trader going long the call and has no more to gain from the transaction.

The payoff for going short calls is limited to the premium paid for the contract. If the stock stays below the call’s strike price, the call seller keeps the whole premium. But the call seller has a potentially huge downside that is exactly the reverse of the call buyer’s upside: If the stock continues to rise, the call seller can lose a theoretically uncapped amount of money.

This potentially unlimited loss is the biggest risk for a call seller, and the short call can lose much more than the premium that was received upfront. However, some options strategies such as the covered call use a short call in a less risky way, by hedging the position with another security.

When it’s used: A trader would generally go short calls when the underlying stock may fall before expiration or at least not rise. If the stock may plummet, traders may instead consider put options.

Example of a short call

Let’s say that stock DEF is trading at $20 per share. You can sell a call on the stock with a $20 strike price for $2, and the option expires in six months. One short call contract yields a premium of $200, or $2 * 1 contract * 100 shares.

Here’s the trader’s profit on the short call at expiration.

The payoff from a short call looks exactly like the inverse of the long call shown before:

• For every stock price below $20, the option expires worthless, and the call writer keeps the full cash premium of $200.
• At stock prices between $20 and $22, the call writer earns a portion of the premium, but the call will be exercised by the buyer and the call writer will not earn the whole $200.
• At stock prices above $22, the call writer loses money overall, losing not only the $200 premium, but also incremental money depending on where the stock closes at expiration.

Traders find the short call attractive because they receive cash upfront and make a promise to deliver the stock to the buyer in the future at a specific price. If the stock doesn’t close above that price when the option expires, they needn’t keep that promise and can pocket the full premium.

The most traders can make is the premium, while the most they can lose is unlimited. That may seem like an unbalanced trade, but calls often expire worthless.

Short calls have a theoretically infinite potential for loss if the stock continues to rise. Before that happens, however, your broker will issue a margin call, but it still could wipe out your account. You could lose much more from a short call than you ever got from the trade. In contrast, the net loss on a long call is always limited to the cost of the option. Yes, you can lose the entire investment if the stock finishes expiration below the strike price, but you’ll never lose more than that. While the loss is capped here, options routinely expire worthless.