Long Call

Purchasing calls has remained the most popular strategy with investors since listed options were first introduced. Before moving into more complex bullish and bearish strategies, an investor should thoroughly understand the fundamentals about buying and holding call options.

Market Outlook

Bullish to very bullish sentiment among market participants.

When to Use

This strategy appeals to an investor who is generally more interested in the dollar amount of his initial investment and the leveraged financial reward that long calls can offer. The primary motivation of this investor is to realize financial reward from an increase in price of the underlying security. Experience and precision are key to selecting the right option (expiration and/or strike price) for the most profitable result. In general, the more out-of-the-money the call is the more bullish the strategy, as bigger increases in the underlying stock price are required for the option to reach the break-even point.

Profit & Loss Chart

Benefit

A long call option offers a leveraged alternative to a position in the stock. As the contract becomes more profitable, increasing leverage can result in large percentage profits because purchasing calls generally requires lower up-front capital commitment than with an outright purchase of the underlying stock. Long call contracts offer the investor a pre-determined risk.

Risk & Reward

Maximum Profit: Unlimited
Maximum Loss: Limited

Upside Profit at Expiration: Stock Price – Strike Price – Premium Paid

Your maximum profit depends only on the potential price increase of the underlying security; in theory it is unlimited. At expiration an in-the-money call will generally be worth its intrinsic value. Though the potential loss is predetermined and limited in dollar amount, it can be as much as 100% of the premium initially paid for the call. Whatever your motivation for purchasing the call, weigh the potential reward against the potential loss of the entire premium paid.

Break Even Point

Strike Price + Premium Paid

Before expiration, however, if the contract’s market price has sufficient time value remaining, the break even point can occur at a lower stock price.

Volatility Changes

Increase In Volatility: Positive Effect
Decrease In Volatility: Negative Effect

Time Decay (Theta)

Negative Effect

The time value portion of an option’s premium, which the option holder has “purchased” by paying for the option, generally decreases, or decays, with the passage of time. This decrease accelerates as the option contract approaches expiration.