Long Call Strategy

Long Calls – Playing a Bull market

For our students, understanding the price behavior of their options positions reduces surprises.

Making the optimization of an option strategy requires careful research about the stock’s prospects.

The more bullish you are, the more willing you may be to purchase options that are significantly out-of-the-money. That means there might have to be substantial increases in the price of the underlying stock for you to break even or to realize a gain by exercising your option or selling it.

Strategy Overview

This is one of the most basic and popular strategies for options traders, the long equity call is a building block for many other more complex option strategies. The long call by itself is flexible with respect to the amount of risk and the potential profits.

One of the main benefits of buying equity options is the possibility of leverage they offer investors with their capital. As we know, leverage can work both ways so traders should always take this into account. Buying options could give you a high percentage gain with a relatively small investment, as opposed to buying the underlying stock. 

Implementing the strategy

We will use this strategy to speculate and sell the long call contracts to close the trade before expiration to realize a gain.

Strategy: Buy 1 Call of a Stock

Market Opinion: Bullish

Profit potential: long call strategy is theoretically unlimited as long as the price of the underlying stock continues to increase.

Maximum Profit Potential: Unlimited

Maximum Loss potential: Limited to the premium paid for the contract.

The break-even point of the long call strategy is equal to the strike price of the purchased call plus the premium paid for the contract.

Break-Even Point at Expiration: Strike Price + Premium Paid

Volatility Increases: Positive Effect

Volatility Decreases: Negative Effect

Whether volatility levels increase or decrease, it is the time value portion of the option premium that will be affected.

With the passage of time, the time value portion of a call’s premium generally decreases – a negative effect for an investor with any long option position.

Passage of Time: Negative Effect

Selling your Calls – Realizing gains or losses

• let’s review the proper terminology: Purchasing one or more long call contracts to hold in a brokerage account is called an opening purchase transaction. Selling such contracts before expiration is called a closing sale transaction.

• Once we purchase a long contract and we hold it in our brokerage account, we are free to sell it at any time before it expires. Doing so will terminate our right to purchase an equivalent number of shares of underlying stock.