0 Long Call



 
The long call option strategy is the most basic option trading strategy whereby the options traders buy call options with the belief that the price of the underlying security will rise significantly beyond the strike price before the option expiration date.

Long Call Construction
Buy 1 ATM Call

Leverage

Compared to buying the underlying shares outright, the call option buyer is able to gain leverage since the lower priced calls appreciate in value faster percentage wise for every point rise in the price of the underlying stock
However, call options have a limited lifespan. If the underlying stock price does not move above the strike price before the option expiration date, the call option will expire worthless.
Graph showing the expected profit or loss for the long call option strategy in relation to the market price of the underlying security on option expiration date.
Long Call Payoff Diagram

Unlimited Profit Potential

Since they can be no limit as to how high the stock price can be at expiration date, there is no limit to the maximum profit possible when implementing the long call option strategy.
The formula for calculating profit is given below:
  • Maximum Profit = Unlimited
  • Profit Achieved When Price of Underlying >= Strike Price of Long Call + Premium Paid
  • Profit = Price of Underlying - Strike Price of Long Call - Premium Paid

Limited Risk

Risk for the long call options strategy is limited to the price paid for the call option no matter how low the stock price is trading on expiration date.
The formula for calculating maximum loss is given below:
  • Max Loss = Premium Paid + Commissions Paid
  • Max Loss Occurs When Price of Underlying <= Strike Price of Long Call

Breakeven Point(s)

The underlier price at which break-even is achieved for the long call position can be calculated using the following formula.
  • Breakeven Point = Strike Price of Long Call + Premium Paid

Example

Suppose the stock of XYZ Company is trading at Rs40. A call option contract with a strike price of Rs40 expiring in a month's time is being priced at Rs2. You believe that XYZ stock will rise sharply in the coming weeks and so you paid Rs200 to purchase a single Rs40 XYZ call option covering 100 shares.
Say you were proven right and the price of XYZ stock rallies to Rs50 on option expiration date. With underlying stock price at Rs50, if you were to exercise your call option, you invoke your right to buy 100 shares of XYZ stock at Rs40 each and can sell them immediately in the open market for Rs50 a share. This gives you a profit of Rs10 per share. As each call option contract covers 100 shares, the total amount you will receive from the exercise is Rs1000. Since you had paid Rs200 to purchase the call option, your net profit for the entire trade is therefore Rs800.
However, if you were wrong in your assessment and the stock price had instead dived to Rs30, your call option will expire worthless and your total loss will be the Rs200 that you paid to purchase the option.



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