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 January 11th, 2011 at 3:42pm
No, nothing happens as you don't actually hold the stock - only a contract which provides the right to buy the stock.
SS January 11th, 2011 at 11:43am
What happens if you buy a long call and the stock pays a dividend. does the holder of the long call have to pay a dividend to the write of the call option?
Peter December 30th, 2010 at 9:26pm
Hi Jerry, hard to say what the odds are, but yes, they are selected at random. The chances of early exercise are higher right before a stock goes ex-dividend.
Jerry December 30th, 2010 at 12:14pm
Hi Peter please don't mind me asking this silly question. say if i write an option and sometime later the other party decides to exercise it but there might be many other people writing exactly the same option as i did in the market. What are the chances that the option i wrote being exercised? Are options being exercised selected randomly? Thank loads!
Peter December 14th, 2010 at 3:41am
Yes, you can sell the options that you purchased back at a profit. If the position is closed then no, you don't have any risk of being exercised.
If your position remained short, then yes, your options could be exercised.
You can also do it in reverse i.e. sell an option and then buy it back at a lower price for a profit.
bharath December 14th, 2010 at 1:13am
hello,
can you tell me if i can sell call and put options after buying them in the first place thereby gaining profits in increased premium values,now that i have sold these options do i run the risk of the buyer exercising it or have i passed on the risk to someone
Neelam November 21st, 2010 at 11:14am
Thanks, this site is so clear, that I understood those concepts just by going through it. So now I don't feel to ask those silly doubts. Thanks once again for your work on this site.
Peter November 15th, 2010 at 5:27pm
Hi Kaushik,
Yes, you can certainly roll it over - you would do this buy buying the Jan11/Apr11 Calendar Spread - selling the Jan call option and buying the April call option.
With this calendar spread, if the market drops off during January you will profit by keeping the premium received for selling the January call options while still being in the game for a bullish move with your long April call options. If the stock doesn't make the expected gain by April, then yes, you will lose your premium paid for the April options.
If you were very bullish on the stock, however, you might be better placed just buying the stock outright - then you don't have time working against you. It all depends on your appetite for risk and your view of the stock. And also what the prices are for the options, which comes down to the volatility. When volatility is low, which means option premiums are low, this is usually a better time to buy options.
kaushik November 15th, 2010 at 12:52pm
Peter
I have a better Q this time :p
I have a call option (out of the money) that expires in JAN 11, i am not sure if the stock will make it. But i am confident it do well by the APR 11.
So is there a way that I can rollover this Call to APR11 Expiry. If so how should i do it. I mean should i cancel JAN11 Call and buy APR 11 call.
And also What are the disadvantages. can you please help me in this
Kaushik
Peter November 12th, 2010 at 2:45pm
Sure, what is it exactly you don't understand?
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