Buying a Call Option
| B/S | Strike | Type | Price |
|---|---|---|---|
| Buy 1 | $45 | Call | $1.29 |
| Net Debit | $129 | ||
A long call option gives the buyer the right to buy the underlying asset at the strike price. The option buyer pays a premium for this right to the seller of the option.
The Max Loss will only ever be the premium that is paid up front to buy the option.
The Max Gain is uncapped and will rise with as long as the underlying price rises.
Characteristics
When to use: When you are bullish on market direction and also bullish on market volatility.
A long call option is the simplest way to benefit if you believe that the market will make an upward move and is the most common choice among first time investors.
Being long a call option means that you will benefit if the stock/future rallies, however, your risk is limited on the downside if the market makes a correction.
From the above graph you can see that if the stock/future is below the strike price at expiration, your only loss will be the premium paid for the option. Even if the stock goes into liquidation, you will never lose more than the option premium that you paid initially at the trade date.
Not only will your losses be limited on the downside, you will still benefit infinitely if the market stages a strong rally. A long call has unlimited profit potential on the upside.
Long Call Greeks
Delta
Gamma
Vega
Theta
201 Comments
Peter December 29th, 2011 at 10:14pm
Hi Tyler,
It looks like you're trying to enter a covered call strategy, which is buying the stock and at the same time selling a $11 strike call option?
So, you're currently long the stock and want to buy a call option on top of this?
Tyler December 29th, 2011 at 8:42pm
Peter,
I am on td ameritrade trying to do a call option and I am not sure I have it right. I am long on MTW and feel it will rise above the 11.0 strike price. It is currently trading at around 9
Trying to buy MTW Jan 21 2012 11.0 call
On the website it has two orders in place after I put in the order:
1.). Buy 100 MTW
2.). sell to open 1 MTW Jan 21 2012 11.0 call
Am I positioned the way I would like to be? The premium is .1. Thanks,,
Denis December 27th, 2011 at 11:35pm
I have a position in long calls that is worthless right now. There are no bids for it and I cannot sell it even though I have a pending order for $0.01. Market depth is clearly showing no bids.
Is this a good proof that the option is worthless so I can claim loss for tax purposes in the current year? The options only expire next year.
Peter December 27th, 2011 at 6:40pm
Hi Jayne B,
With such a large stock increase the option will likely be deep in the money and have a large delta (approaching +1). This means that the options' value will change almost exactly in line with the stock. So, whether to sell now or not depends on your view of the market. At this point the position in the option will just be like having the position in the stock.
If it were me, I would probably sell and capture the gains so far and move onto the next opportunity. Up to you though ;-)
jayne b December 27th, 2011 at 4:42pm
Hi Peter,
I'm new to trading in options and am unclear about the best time to sell my call option. Here's the deal:
For Jan 12 expiration:
Bought 500 shares of XYZ for $11 a share. The option price is now $25 a share. Clearly I'm in the money and the stock price seems to be steadily going up. Would it be better to sell the option now or wait until we're closer to the expiration date? (Again, I'm assuming the stock price continues to rise. I understand that's only one possible scenario.)
Thanks so much for your advice.
Peter December 21st, 2011 at 10:34pm
Hi Rebecca,
Then best to just allow them to expire as you'll incur additional transaction costs if you sell.
Peter December 21st, 2011 at 10:33pm
Hi Srikanth,
You will have to buy the stock at the strike price, which is 20, so you'd be up for an additional $2,000.
Rebecca December 21st, 2011 at 10:09pm
Hi Peter,
I currently hold January 2012 call options that are worth pretty much nothing (I bought them for much more and unfortunately lost money on them). My question is whether it is better to sell the options now or to let them expire? Is there a difference? There's no way they'll go up in value between now and January.
Cheers,
Rebecca
Srikanth December 21st, 2011 at 8:03pm
Peter,
Could you Please clarify me one thing...
I am going for Long call on XYZ stock
JAN 2013 contract @20.0 ( BID:11.15 ASK:12:50)
For that I have to pay 12.50*100=1250$ (This is the amount i am paying now) to enter into option contract
During expiry time...i.e JAN 2013 ..If i want to buy the shares .
As I already paid 1250$,Then How much I have to pay for buying the 100 shares?
Is it 20*100=2000$
or 2000-1250=750$
2000$ or 750$ ??
Peter December 11th, 2011 at 5:38pm
Hi Stuart, thanks for the comments about the site, much appreciated!
Your decision will depend on your confidence with the stock and what your investment objectives are. If you like trading options and enjoy the leverage on your investment then you might want to sell the options, take the profit and move onto another trade. However, you might really like the stock and consider holding it as part of a longer term plan for your portfolio. If this is the case, then you could exercise and take delivery. But, remember that you will need to invest a lot more money if you exercise the options and take delivery - $49,500 (45 x 100 x $11).
If you don't exercise you will have $50k to use with other option trading opportunities - or to spread out and buy more stock with.
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