A call option is a contract that gives the holder the right – but not the obligation – to buy a specified quantity of an underlying asset at a predetermined strike price before a given expiration date. If the asset’s market price exceeds the strike at expiry, the holder profits; if not, the option expires worthless and the holder loses only the premium paid.
Key components#
- Underlying asset – the token or asset the option references (e.g. ETH, BTC).
- Strike price – the price at which the holder can buy.
- Premium – the upfront cost the buyer pays for the contract. This is the buyer’s maximum possible loss.
- Expiration date – the deadline to exercise. After this the contract is void.
Moneyness#
A call option’s relationship to the current spot price determines its moneyness:
| State | Condition | Intrinsic value |
|---|---|---|
| In-the-money (ITM) | Spot > Strike | Positive |
| At-the-money (ATM) | Spot ≈ Strike | Zero |
| Out-of-the-money (OTM) | Spot < Strike | Zero |
Moneyness affects the premium: ITM options cost more because they already carry intrinsic value.
Payoff#
At expiration the payoff of a long call is:
payoff = max(spot - strike, 0) - premiumThe buyer’s downside is capped at the premium. The upside is theoretically unlimited.
Example#
A trader buys an ETH call with a $2,000 strike, expiring in 30 days, for a $100 premium.
- If ETH is at $2,500 at expiry, the option is worth $500 and the net profit is $400.
- If ETH stays below $2,000, the option expires worthless and the loss is $100.
Common strategies#
- Covered call – hold the underlying asset and sell a call against it, collecting premium in exchange for capping upside.
- Bull call spread – buy a call at a lower strike and sell a call at a higher strike, reducing premium outlay but capping maximum profit.
- Protective call – buy a call to hedge a short position against an adverse price rise.
Comparison with put options#
A call gives the right to buy; a put option gives the right to sell. Calls profit from rising prices, puts from falling prices. The two are linked through put-call parity – given the same strike and expiration, mispricing between the two creates an arbitrage opportunity.
On-chain options#
In DeFi, call options are implemented as smart contracts on networks like Ethereum. Protocols such as Lyra, Hegic, and Opyn let users buy and sell calls without a traditional broker. The contract handles collateral, settlement, and exercise automatically.
Key differences from traditional options markets:
- Collateral is on-chain – sellers lock collateral in the contract, removing counterparty risk.
- Settlement is automatic – ITM options are typically settled at expiry without manual exercise.
- Implied volatility is often computed by the protocol’s pricing engine rather than derived from an order book.
Risks#
- Total premium loss – if the option expires OTM, the entire premium is lost.
- Time decay – as expiration approaches, the option’s time value erodes (measured by theta). This works against the buyer.
- Volatility contraction – a drop in implied volatility reduces the option’s price even if the underlying hasn’t moved.
- Smart contract risk (DeFi-specific) – bugs or exploits in the options protocol can lead to loss of premium or collateral.