What Is A Long Call?
A Long Call is a basic options trading strategy, where a trader creates a long position in a call option of a particular underlying asset believing that the price of the underlying asset will rise beyond the strike price before a certain expiration date. The underlying asset can be a stock, index, currency, commodity, or other financial instruments.
A long call options trading strategy generally doesn’t acknowledge in a 1-to-1 ratio with the stock, but the options pricing models can give investors a rough idea on the increase and decrease in option premium. Most of the call option buyers have the plan to resell the option at a profit is watching for suitable occasions to close the position early, mainly with a rally in stock price or with a sharp increase in volatility in the market.
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Understanding Long Call
The call option contract gives its buyer the right to purchase the underlying security at a specific price, called the strike price at specific expiration date. When you buy a call option at a specific strike price, you have to pay a premium depending upon the strike price and if the stock price stays below the strike price till expiry, your option contract will expire worthlessly.
So in order to create a long call option, you have to buy a call option of a stock or other security at a specific strike price, that may be in-the-money, out-of-the-money, or at-the-money call option depending upon your expectation in the stock price. If you expect a stock will move upward significantly then an out-of-the-money call option will give you a higher return.
- Maximum Profit = Unlimited
The maximum profit potential in the long call option is theoretically unlimited. The best that can occur is for the stock or other security’s price to rise to higher and higher with no limit. In that case, the trader could either sell the option contract at a hypothetically infinite profit or exercise the contract and purchase stock at the strike price.
- Maximum Loss = Premium Paid
The maximum loss in the long call option strategy is limited and the trader will lose only the premium he paid for the call option. If the trader holds the call option till expiry and the stock price stays below the strike price then the option contract would expire worthlessly.
- Breakeven = strike price + premium
Long call options strategy breaks even if the stock price is equal to the strike price plus the buying price of the call option. Stock price over that point creates a net profit.
Suppose there is a stock trading at $100 per share having a lot size of 100, and you believe it will go to $110 or higher. You buy call options with a strike price of $100 and a cost of $3.
If the stock moves above $103, your long call option trade is profitable, and you earn $100 for every dollar the stock goes above the $103 (because lot size is 100). The option price will increase with the stock price, so you can sell your options to book the profit. As expectation of your stock hit the $110 level the option value would be $10 during expiration and you will get $7×100 equals $700 profit from each lot.
In other scenarios, if the stock price stays at $100 or below till the expiry then the option price would expire worthlessly.
The long call option is a quite good strategy if you are highly bullish on a stock as it requires very little investment and there is a very good chance of getting a multifold return in just a few days. There are several other scopes as if the volatility of the whole market increases then also there is a chance of good return even if the stock price stays right there.