There are two primary reasons investors will use call options. One is to speculate and the other is as a hedge against risk. At the most basic level, a call option allows an investor to speculate in stocks without actually owning them. Any time an investor purchases a stock they are acting on a speculation they have that a stock is going to move in a specific direction. But no matter how confident an investor might be that a stock is going to increase in value, there are no guarantees. That’s where a call option can be useful.
For example, you may decide to purchase a call option on Apple because they are coming out with a new phone and you think the price will rise above its current price of approximately $213. If you have the ability to spend $21,300 to buy 100 shares, you can do that and if it rises to $220, you’ll be set for a nice gain. But you read something about a supplier issue that might delay the launch, you’re pretty sure it won’t be an issue, but you’d rather not take a chance of spending your own money on a launch that may fizzle. By purchasing a call option for 100 shares of Apple stock, you are only risking the cost of the premium which we’ll put at $2 (it may be a bit higher than $2 because of the stock’s market value). In any case, if the launch fizzles, you’ve only put $200 at risk. However, if you purchased the stock outright and the shares that were worth $213 drop to $209, you’ve lost $400 and your potential future risk is hypothetically limitless. In this case, buying a call option can help minimize your downside risk.
As you can also see from this example, a call option provides a hedge against unforeseen events. Let’s say you purchased the call option and a week before the contract expires, Apple announces a huge recall on iPhones. You’ll be glad you’ll only be out the premium for an expiring contract.