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
Nat August 6th, 2011 at 8:27am
Hello Peter,
If I bought a call option contract at $2 for a strike price of $10 but the price of the underlying stock is rising to $20 and the premium increases to $4. I want to offset the position by selling it to obtain a $2 profit before the expiry date.
Then after that, as the seller of the call option, will I be obliged to sell the share for $10 before the expiry date of that contract to the person I sell the call option to? Do I have to place a margin in the broker`s account as a seller of the call option?
Another question is if I buy the call option contract at $2 for a strike price of $10. But the price of the underlying stock rises to $11 at the expiry date and I exercise it. I will actually have bought it for $12 (strike price+premium and not including commission paid to broker for buying the contract and exercising the option plus taxes) which means that although the price of the stock has risen, I have made a loss of at least $1?
Thank you for your time.
Peter June 4th, 2011 at 6:43am
Hi Konstantin,
1 & 2 - Not all companies have listed options available to trade. You will need to check with the exchange website whether options are listed on the company you're interested in. Are you looking at US companies? If so, check the CME site.
3 - No, listed options are standardized by the exchange so once they expire you cannot change it. You can, however, roll your position from one month to the next if you want to maintain the option.
4 - If the option has expired out-of-the-money then nothing happens at expiry - you just lose the premium paid.
Konstantin June 3rd, 2011 at 9:47pm
Hi Peter!
I have a couple question very simple.
1-Can I Buy/Sell options stocks of micro-company? (price around .3$/share)
2-Is only specific company trade option or all of them?
3-Can you extend your expiration date?
4-If the expiration date is not finished yet, but in reality I make a loss of 100% , my option will be sold automatically?
Bdw, great website, simple and very clear!
Thank You!
Konstantin
Peter May 31st, 2011 at 8:04am
Hi RK, the P&L graph represents the time value of the option. It plots the theoretical profit and loss now with an option that expires in 60 days.
RK May 31st, 2011 at 2:45am
What is P&L in graph?
Could you please explain the graph in detail?
Peter May 11th, 2011 at 6:42pm
The option will never be de-listed before expiry - as it is likely other traders will have open positions in these contracts.
If the stock price has dropped significantly the call option will simply be considered worthless by the market. When this happens, you will probably notice that there will be no market bid for these contracts but there may be offers to sell the option at very low prices.
LMer May 11th, 2011 at 6:19pm
I am curious. If I buy an out-of the-money long call for .80 that expires in Nov. or Dec. and it drops to N/A is it still a valid contract that will "re-appear" when the stock value rises? Can it be delisted and just dissapear?
Manan May 6th, 2011 at 3:02pm
Thanks Peter.
Peter April 28th, 2011 at 11:41pm
Hi Manan, you won't have to do anything - the assignment of the stock due to the exercising of the short call option is handled automatically by your broker/clearer. You will just keep the premium and have zero position in the stock.
Manan April 28th, 2011 at 3:25pm
Peter, I have a question:
I own the ABC at 25.00 and I sold the in-the-money one call option for May 21, 2011 for 1.4 and earned a premium of 140. Assume it will be traidng at 28.00 by May 21, what will I have to do, apart from selling my stock at 25? Is there anything that I need to do? Reply will be appreciated. Thanks
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