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Long Call Option Strategy With Example

The long call option strategy is ideal for those looking to make profits from the bullish movement. The long call option strategy is the most basic options trading strategy. Some investors are bullish about the prospect of buying calls. They will use the best method to capture upside potential with limited downside risk. So buying a call is a basic option of all strategies. It has the first options trade for those who are familiar with buying/selling stocks and want to trade options. Here buying a call is easy to understand. You buy a call means you are bullish that you expect the underlying stock/index to raise in the future. These is a basic and generally traded contract that new investors will use as they do a transition from stock trading. A call option is purchased when you have an expectation that is underlying stock that will arise in the future. The call has an option as a buyer you will pay a premium now for the right to purchase shares in the future at some predefined price. This premium is then added to the share price that you have selected to determine the break-even point. The options trading can be an exciting form of trading.there is many opportunities to make a big profit and reduce the risks. There are many options strategies that will be challenging for a beginner to decide which approach will work best in which situation.

When to use

Use the Long call option when you are bullish to very bullish in the market. These spread strategy will allow you to profit from a less price gain in the underlying stock. A call spread involves buying a call option at one strike price and sells calls at a higher strike price. These will give you the right way to buy the underlying stock at the strike price. The long call may be used as an alternative to buying stock. We get profit if the stock rises without taking all of the downside risks that may result from owning the stock. We can gain leverage over a larger number of shares than you could afford to buy. Because calls are less expensive than the stock itself but you must be careful with short term money calls. If you buy many options contracts then you are increasing your risk.

These strategy is the most basic options trading strategy where the trader buys call options with belief that the price of the underlying security will rise beyond the strike price before the expiration date. Investors will buy call options when they expect that an underlying price will increase in the future but don’t have enough money to buy the actual stock. If the stock price is above the strike price on expiration the profit/loss is calculated by taking the stock price. And then subtracting the strike price and the premium paid. It is multiplying that by the number of controlled shares.

Profit

Here the Profit increases as the market rises. But at the time of expiration break-even point will call option exercise price A+ price paid for the call option. Here there is profit from a smaller price gain in the underlying stock. There is no limit to the maximum profit possible when implementing the strategy. The formula for calculating profit is as follows,
Maximum profit=Unlimited
Profit Achieved at Price of Underlying >= Strike Price of Long Call + Premium Paid
Profit=Price of Underlying-Strike Price Long Call –Premium Paid

Loss

Loss is limited to the amount paid for the option. The maximum loss is realized if the market ends below. The Risk for these strategy is limited to the price paid for the call option. We don’t matter how low the stock price is trading on the expiration date. The formula for calculating maximum loss is,
Max Loss = Premium Paid + Commissions Paid
Max Loss Occurs When Price of Underlying <= Strike Price of Long Call

Break Even Point

The breakeven on a long call is calculated by adding the premium from the strike price. The underlier price is at the breakeven that is achieved for a long call position. This can be calculated using the formula,
Break Even Point=Strike Price of Long Call+ Premium Paid

Example:-

If you bought a long call option on a stock that is trading at $49 per share at $40 price. You are betting the price of the stock that will go up above $40.The long call you are buying is out of the money because the strike price is higher than the current market price of the stock. But as it is out of the money it will be cheaper. This is a good strategy if you are very bullish on a stock and think that it will increase in a set period of time.

Conclusion

The long call is an investment that allows the investor to wager on the increase in the stock. The investor must handle the potential loss of the entire premium if they are wrong. Here traders can earn much more through the call ownership compared to owning stock but the risk of losing is also high. We have concluded that a long call option strategy is a popular trading strategy when the trader is bullish for the market. Using these can keep his profit unlimited and limit his loss to the amount of premium paid.