The Problem with Buying Standalone Calls

The Problem with Buying Standalone Calls

A Beginner’s Guide to Option Strategies — Part 3

Buying Calls Means Paying for Time — I Prefer Selling It

Buying a call is one of the simplest bullish option trades. You pay a premium for the right, but not the obligation, to buy a stock at a specified strike price by a specified expiration date. If the stock rises far enough, the call can produce a large percentage gain while requiring much less capital than purchasing 100 shares.

That combination makes long calls appealing. But buying a standalone call is not my preferred way to invest in a company because I do not like the combination of time decay, an expiration deadline, and the possibility of losing the entire premium. I would generally rather buy the shares, sell a cash-secured put, or construct a call spread in which the premium received from a sold call offsets part of the cost of the purchased call.

My objection is not that purchased calls can never work. It is that a standalone call requires me to pay for time and then asks the stock to make a sufficiently large move before that time runs out. That is a different proposition from simply being right that the company will become more valuable over time.

In Part 1 of this series, we examined how expiration changes the economics and management of an option sale. In Part 2, we applied that framework to covered calls. This installment turns to the other side of the transaction: what happens when we buy a call and pay time value rather than collect it?

We Have to Be Right About Direction, Size, and Timing

Buying shares requires a directional judgment: over time, you expect the stock to rise. Buying a call requires more. You must be sufficiently correct about the direction, size, and timing of the move to overcome the premium you paid.

At expiration, the breakeven price of a long call is:

BREAKEVEN = STRIKE PRICE + PREMIUM PAID

If the stock finishes below the strike, the call expires worthless and the entire premium is lost. If it finishes above the strike but below the breakeven price, the call has intrinsic value, but the trade still loses money. The stock rose above the strike—just not far enough to recover the premium. To earn a profit at expiration, the call’s intrinsic value must exceed the amount originally paid for it.

This formula applies at expiration. Before then, a call may still contain time value. If the stock rises quickly or implied volatility increases, the investor may be able to sell the call for a profit even though the stock has not reached the expiration breakeven. That is an important qualification: the stock does not always have to reach the strike plus the premium before the call can be sold profitably. As expiration approaches, however, the remaining time value disappears and the expiration breakeven becomes decisive.

The Options Industry Council’s explanation of buying a long call makes the central tradeoff clear: time decay works against the buyer, while the maximum loss is limited to the premium paid. That limited loss is a genuine advantage, but it does not make the premium inexpensive or likely to be recovered.

Example 1: L3Harris and the Cost of One Month

L3Harris Technologies (LHX) closed on Friday, August 14, 2026, at $291.82. We will round that to $292. The September 18 calls had 35 days remaining.

As in the earlier installments of this series, the prices and Greeks below were recorded at a specific moment and are meant as examples, not live quotes — option prices change continuously.

Here is the displayed call chain. All option prices are quoted per share; one standard equity-option contract represents 100 shares.

The $290 call—slightly in the money and carrying a Delta of approximately 0.53—was quoted at a bid of $8.00 and an ask of $10.40. A buyer cannot assume a fill at the midpoint between bid and ask. A limit order might be filled somewhere between the bid and ask, but the unusually wide spread makes the execution price uncertain. To avoid assuming a better fill than offered, we will use the $10.40 ask in this example.

At a $292 stock price, the call contained $2 of intrinsic value:

$292 STOCK PRICE − $290 STRIKE = $2 INTRINSIC VALUE

If purchased at the $10.40 ask, the remaining $8.40 was time value, also called extrinsic value (as discussed in Part 1, Why Time Matters When You’re Selling Options):

$10.40 CALL PRICE − $2 INTRINSIC VALUE = $8.40 TIME VALUE

One contract would cost $1,040. At expiration, the buyer must recover the $10.40 premium per share before the trade becomes profitable. That produces an expiration breakeven of $300.40:

$290 STRIKE + $10.40 PREMIUM = $300.40 BREAKEVEN

LHX would therefore need to rise approximately $8.40, or about 2.9%, from the rounded $292 share price by September 18 merely for the call to break even at expiration.

In the Money Does Not Necessarily Mean Profitable

The chain helps put that hurdle into perspective. Traders often use Delta as a rough guide to the likelihood that an option will finish in the money. While Delta is not a literal forecast, and it does not directly tell us the probability that the trade will be profitable, it can provide a useful comparison among options.

The $290 call’s Delta of approximately 0.53 suggests roughly even odds of LHX finishing above the $290 strike. But finishing above $290 is not enough for the buyer to profit; LHX must finish above $300.40 to recover the full premium.

The $300 call in the same expiration had a Delta of approximately 0.36. Because the $290 call’s $300.40 breakeven was slightly above that strike, the chain suggests that the probability of reaching the profitable range was considerably lower than the probability of merely finishing above $290. This is a rough comparison, not a personalized forecast or a measure of the option’s expected return, but it illustrates the important difference between finishing in the money and finishing profitably.

Suppose LHX remained at $292 through expiration. Someone who bought 100 shares would have neither a gain nor a loss before costs. The $290 call would finish with $2 of intrinsic value, but the buyer who paid $10.40 would lose the other $8.40, or $840 per contract. If LHX finished at or below $290, the call would expire worthless and the full $1,040 premium would be lost.

The stockholder has no comparable expiration date. The shares could decline, of course, and buying 100 shares would require approximately $29,200—far more capital than buying the call. But if the investment thesis takes longer than 34 days to develop, the stockholder can continue holding without paying for another block of time value. The call buyer must close the position, exercise it if it is in the money, let it expire, or purchase additional time by replacing it with a later-dated option.

That is the heart of my objection. If I want to own LHX at approximately $292, paying $10.40 for the temporary right to buy it at $290 does not necessarily improve my position. At the ask, the strike plus premium produces a $300.40 expiration breakeven. I am paying $8.40 of time value for leverage, limited risk, and the right to walk away without suffering the much larger potential loss associated with owning 100 shares. Those are real benefits, but they come with a meaningful hurdle: the option chain suggests that LHX is considerably more likely to finish below the call’s expiration breakeven than above it.

Extending the Expiration Does Not Eliminate the Cost

Moving to the January 15, 2027 expiration gives the thesis more time, but that additional time has a price. With 154 days remaining, the LHX calls were quoted as follows:

The implied volatility across the LHX calls was generally in the mid-to-upper 20% range, which appears moderate for an established large-cap company. By comparison, as the next two examples in this piece will show, the longer-dated MSFT calls carried implied volatility of approximately 34%–35.5%, while the short-dated CBRS calls were priced at roughly 90% or more. These are not apples-to-apples comparisons because the companies and expirations differ, but they illustrate the broad range of uncertainty that option prices can reflect. More importantly, the LHX example shows that even at relatively moderate implied volatility, buying a call can require paying substantial time value.

At the $24.20 ask, the $290 call contained $2 of intrinsic value and $22.20 of time value. Comparing the same strike across the two expirations makes the tradeoff clear:

The January call gives LHX almost four additional months to rise, and its time value will initially decay more slowly than that of the September call. But the buyer pays $2,420 per contract at the quoted ask and needs LHX above $314.20 at expiration to show a profit then. More time gives the thesis a greater opportunity to work, but it also increases the dollars at risk and raises the expiration breakeven.

Example 2: Microsoft and the Price of Waiting a Year

Microsoft (MSFT) closed at $495.40 on August 14. The September 17, 2027 calls had 399 days remaining. The displayed strikes surrounding the $600 call were:

The $600 call was quoted at $34.45 bid and $37.80 ask; its last trade was $36.42. Because the $600 strike was more than $100 above the stock price, the entire premium was time value.

At the displayed ask, one call would cost $3,780 and have an expiration breakeven of $637.80:

$600 STRIKE + $37.80 PREMIUM = $637.80 BREAKEVEN

MSFT would have to rise $142.40 from $495.40—approximately 28.7%—for a call bought at the ask to break even at expiration. If MSFT rose substantially but finished at $620, the directional forecast would have been correct: the shares would have gained more than 25%. Yet the call would be worth only $20 at expiration, producing a loss of $17.80 per share, or $1,780 per contract, relative to the $37.80 purchase price.

The $600 call’s Delta of approximately 0.36 provides another useful comparison. Using Delta as a rough guide, the chain suggests something in the general range of a 36% chance that MSFT will finish above $600. The chance of finishing above the still-higher $637.80 breakeven would be lower. A price substantially above $637.80 could produce a large payoff, but the premium paid up front creates a substantial hurdle that must be overcome by expiration.

This does not make the trade irrational. The call provides exposure to 100 shares for a $3,780 premium rather than requiring $49,540 to purchase those shares immediately. Its maximum loss is $3,780, while 100 shares could lose far more if Microsoft suffered a severe decline. The call buyer also preserves the remaining capital for other purposes.

Those advantages are precisely what the premium purchases. The investor is not simply expressing the view that Microsoft will rise. The investor is paying for leverage, limited dollar risk, and more than a year of opportunity—and must overcome that price.

For an investor who wants to own Microsoft indefinitely and can afford the shares, I generally prefer the simpler proposition. The stock has no expiration and no time-value premium that must eventually disappear. It participates dollar for dollar in any appreciation and can be held if the thesis takes longer to develop. The tradeoff is that stock ownership requires much more capital and exposes the investor to the full decline if the stock falls. Another alternative is a call spread, which pairs a purchased call with a call sold against it. The premium received from the sold call offsets part of the purchased call’s cost, although it also limits the position’s potential gain.

Example 3: Cerebras—High Volatility Has a Cost

Cerebras Systems (CBRS) closed at $218.98 on August 14, which we will round to $219. Its September 18 options had 35 days remaining and implied volatility around 90% or more across most of the displayed strikes. That high implied volatility translates into expensive calls.

One interesting feature of this chain is that the $230 call had a Delta of approximately 0.50 even though CBRS was trading near $219, placing the strike about $11, or 5%, above the stock price. The explanation lies largely in CBRS’s extremely high implied volatility: when the market is pricing in a very wide range of possible outcomes, an $11 move does not appear especially large.

This does not mean there was a literal 50% chance that CBRS would finish above $230. Rather, it shows how strongly the option was expected to respond to movements in the stock and why Delta should be treated only as a rough probability shortcut, particularly for an extremely volatile option.

That expected volatility was also reflected in the call’s price. The $230 call was quoted at a bid of $20.00 and an ask of $22.10. Because CBRS was below the $230 strike, the call had no intrinsic value, so the entire $22.10 ask price consisted of time value. One contract would cost $2,210 and have an expiration breakeven of $252.10:

$230 STRIKE + $22.10 PREMIUM = $252.10 BREAKEVEN

CBRS would need to rise $33.10 from the rounded $219 price, or approximately 15.1%, in 35 days for that call to break even at expiration. A 10% rally would be an excellent month for most stocks, but it would leave CBRS near $240.90. At expiration, the $230 call would then be worth approximately $10.90, producing a loss of about $11.20 per share—or $1,120 per contract—for someone who paid $22.10.

If CBRS finished at or below $230, the call would expire worthless and the full $2,210 premium would be lost. The market charged so much for the call because it recognized that CBRS could move dramatically. High volatility creates opportunity, but the expected magnitude of that movement is already reflected in the option’s price.

The call could become profitable before expiration without CBRS reaching $252.10, particularly if the stock rallied quickly or implied volatility increased. The opposite is also true: if CBRS failed to move, or if implied volatility declined, the call could lose value rapidly even before much calendar time had passed.

This is a clear example of why being bullish is not enough. Buying an expensive call on a volatile stock requires believing that the stock will rise farther—or sooner—than the option market has already priced in.

Why Buying the Stock Is Not Automatically Safer

My preference for shares needs an important qualification. Buying stock is not universally safer or more economical than buying a call. A stock and a call can both lose 100% of the amount invested, but the paths to that loss are very different. An established company’s shares are unlikely to become completely worthless within a month, while a short-dated call can expire worthless simply because the stock finishes below its strike. The call buyer may therefore place fewer dollars at risk while accepting a much greater likelihood of losing every dollar committed to that position.

The smaller maximum dollar loss is one of a call’s clearest advantages. If I buy the MSFT call for $3,780, I cannot lose more than $3,780 on that call. Buying 100 Microsoft shares requires $49,540 and could produce a much larger loss. The call also provides leverage: a major rally can create a large percentage return on a comparatively small initial investment.

But every dollar of time value paid for the call will have disappeared by expiration, regardless of what the stock does. A sufficiently large increase in the stock can create enough intrinsic value to offset that cost and produce a profit, but it does not preserve the time value. If the stock remains unchanged or rises by too little, the loss of that time value produces a loss on the trade.

Stock, by contrast, provides a durable ownership interest. It does not expire and does not require the investor to overcome purchased time value. A stockholder receives the full appreciation in the shares and may also receive dividends, neither of which belongs to a call holder. Purchasing the shares, however, requires far more capital and exposes the investor to a much larger potential dollar loss.

This is the double edge of leverage. Calls allow an investor to obtain substantial bullish exposure—or positions in several stocks—while committing much less capital than purchasing the shares. Investing less money, however, does not make each dollar safer. The lower cost can tempt an investor to buy several contracts or take more positions, potentially placing more capital into short-dated or out-of-the-money trades with a comparatively high probability of total loss. A call can therefore limit the loss on one position while increasing overall portfolio risk if its apparent affordability encourages overexposure.

Why Selling a Put Is Different, Although Both Are Bullish

If I want to establish a bullish position, I may instead sell a cash-secured put. The seller collects premium and agrees to buy the shares at the strike price if assigned, producing an effective purchase price equal to the strike minus the premium received. This places time decay on the seller’s side, but it does not duplicate share ownership or a long call: the maximum gain is limited to the premium, while the seller must maintain enough capital to purchase the shares and still bears substantial downside risk.

Why I Might Buy a Call Spread

A bull call spread changes the economics by combining a purchased call with the simultaneous sale of a higher-strike call with the same expiration. The premium received from the short call offsets part of the premium paid for the long call.

The investor therefore reduces the initial cost and lowers the expiration breakeven. In exchange, the higher-strike call caps the profit. The maximum loss is the net debit paid. The spread’s maximum value at expiration is the distance between the strikes, so its maximum profit is that distance minus the net debit.

Using the LHX September chain, consider buying the $290 call at its $10.40 ask and selling the $300 call at its $4.90 bid. Using those displayed quotes, the net debit would be $5.50:

$10.40 PAID − $4.90 RECEIVED = $5.50 NET DEBIT

The expiration breakeven would fall from $300.40 for the standalone $290 call to $295.50 for the spread. The most the $10-wide spread could be worth at expiration is $10, creating a maximum profit of $4.50 per share and a maximum loss of $5.50 per share.

The spread does not make the trade automatically attractive. LHX still must rise enough before expiration, and the wide bid-ask quotes could materially affect execution. But selling the $300 call offsets almost half the cost of the $290 call and reduces the expiration breakeven by $4.90. In return, any LHX price above $300 produces no additional value for the spread at expiration.

The same principle is even more visible in CBRS. Using the displayed quotes, buying the September $230 call for $22.10 and selling the $250 call for $13.80 would create a $20-wide call spread for an $8.30 net debit:

$22.10 PAID − $13.80 RECEIVED = $8.30 NET DEBIT

Its expiration breakeven would be $238.30 rather than $252.10 for the standalone $230 call. Its maximum profit would be $11.70 per share, reached if CBRS finished at or above $250 at expiration.

This structure fits a more specific forecast: I believe CBRS can rise meaningfully, perhaps to $250, but I do not want to pay for unlimited upside. I finance part of the purchased call by selling some of the expensive premium embedded in the higher-strike call.

Future installments will examine other strategies that combine purchased and sold options in greater detail.

When Buying a Standalone Call Can Make Sense

A standalone call may make sense when an investor wants bullish exposure without committing the capital required to buy 100 shares. It limits the maximum loss to the premium paid, preserves cash for other purposes, and provides leverage if the stock makes a large move. A short-term trader may also prefer a call when the objective is to trade an anticipated move rather than own the business.

A deep-in-the-money, longer-dated call with relatively little time value can sometimes serve as a partial substitute for stock, although it still expires. At Phil’s Stock World, we often buy longer-dated, in-the-money calls and sell shorter-dated, higher-strike calls against them. The premium collected from the short calls helps offset the cost of the long calls, so this is not the same as simply buying standalone calls.

A Question to Ask Before Paying Premium

Before buying a call, ask what it provides that owning the shares does not. If the answer is limited dollar risk, leverage, or the ability to commit less capital, paying the premium may be justified. If the thesis is simply that the stock will appreciate over an uncertain period, owning the shares or selling a cash-secured put may make more sense.

When the investor has a defined price target and time frame, a call spread may be more attractive. Selling the higher-strike call reduces the net premium paid and lowers the expiration breakeven. In exchange, it caps the position’s potential gain.

A standalone call can be the right tool, but it is not my default way to invest in a business I expect to appreciate over time. Being right about the company is difficult enough. I generally do not want to add the requirement that I also be right by a particular date—and by enough to overcome the premium paid.

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A Beginner’s Guide to Option Pricing

Complete Series Index

1. Theoretical Value and Market Price
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2. Implied Volatility: A Commonly Misunderstood Number in Options
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3. Pricing Dynamics: Infrequently Traded Options
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4. When the Crowd Takes Over: Reading a Highly Liquid Option Chain
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5. Why Calls and Puts Are Almost Twins: Put-Call Parity
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6. Delta: The Most Important Number in the Option Chain
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7. Gamma: How Fast Delta Itself Changes
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8. Theta: The Cost of Time
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9. Vega: The Price of Uncertainty
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A Beginner’s Guide to Option Strategies

New Series

1. Why Time Matters When You’re Selling Options
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2. Covered Calls: Match the Strategy to Your Objectives
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The Options Case Files

1. The Options Case File, No. 1: The Situational Awareness Unwind
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