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 September 29th, 2014 at 7:24pm
Hi Timitao,
Yes, I think selling ATM/OTM is preferable to selling another ITM call; there would be little difference in selling a slightly higher/ITM call to simply exiting your existing ITM position.
A long deep ITM call is like being long the stock. So you have to have a view on the direction on the stock; if you are no longer bullish and think the stock might turn, then best exit your option position. If you are neutral to bullish, then the most appropriate strategy is to sell ATM/OTM calls on the back of your existing position for premium and profit limit.
timitao September 29th, 2014 at 9:55am
My thinking is with a decent long position and no intentions on taking delivery of shares due to capital constraints (basically a weak long position), selling some upside calls would help reduce risk while collecting additional premium. And while the goal would be to just flatten the position, if I wanted to take the position to the last day the volatility and wide Bid/Ask could be dangerous.
I just wanted to make sure these would offset on settle as If the upside calls end up being in the money, trying to by back the higher priced calls while selling the deep in the money calls on the last day could be problematic. If the upside calls dont end up being in the money, I would just collect the premium.
I would be interested in your view, as I think selling out of the money calls (that could end up in the money) on up days, against the deep in the money long position could be gradual way to reduce exposure to a sharp downfall.
Timitao
Peter September 24th, 2014 at 8:15pm
Hi Timitao,
Yep, you can do this. A long deep in the money call option will have a delta close to (if not equal) to 1. That means that the option behaves just like the underlying stock in terms of value change. So selling another call option with a higher strike price will be like a covered call on a long stock position.
Just a question - why sell another in the money call? If you want to lock in profits on your existing call option then you can just sell the same option back and close it out. If you sell an out of the money or in the money call you will still receive some premium and lock in a higher exit price if the market rallies.
Timitao September 24th, 2014 at 11:40am
Hello
If I own a long in deep in the money option can I sell a similary expiration dated call option at a higher price (still in the money) and let them both go to expiry?
ie in an example like Priceline where I wouldn't have the capital to cover 1000 shares, would selling the other call offset on expiry?
Thank you
Peter August 1st, 2014 at 10:00pm
Hi Eresh,
The blue graph shows the payoff at the expiration date of the option while the pink line shows the theoretical P&L of the position 60 days prior to the expiration date. As the time to expiration approaches the pink line moves closer to the blue line.
Eresh August 1st, 2014 at 6:27pm
Hi Peter, I don't understand how to intuitively predict the P&L + 60 days curve. Could you explain please?
Peter June 22nd, 2014 at 9:50pm
Hi K.N, it's a good question and I'm not too sure either - let me investigate and come back on that one.
K. N. June 19th, 2014 at 12:48am
Hi Peter,
I have a quick question on the long duration of a call (or put) option.
Assuming I buy a call for APPL, with strike price, say 200, expiration 7/2016, for 50c a contract.
Then in July of year 2016, APPL price is 500 (hypothetically) and the option chain table only shows strike range from 400 to 600 with 10 dollars increment; it doesn't even show a strike price of 200..
Are you still able to sell your call (or put) if it's not shown on the option chain table?? How can you tell what is the asking/bidding price for your contract for that strike price?
I'm sorry for the amateur question, I just don't know where to turn to to ask.. :)
Thank you. :)
Peter April 23rd, 2014 at 7:06am
Hi Steve,
Sounds like your second order was taken out by a market maker - that is, their electronic trading system must have had an automatic sell level at around the price of your second buy order, so as soon as your price reached the market it was immediately and automatically taken out.
Peter April 23rd, 2014 at 7:05am
Hi Joey,
It depends on the bid/ask spread. If the options are liquid and the bid/ask spreads are tight, then yeah, I'd just be buying at the offer price to get set straight away rather than risk losing out on getting in on the position. Also depends on your trade too - if you expect to hold the trade for a few days at least then this margin of paying up probably isn't going to mean much in the long run.
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