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

steve April 21st, 2014 at 9:05pm

hello peter,
my question is similar to joey's..i have excercized two calls on a stock which is trading at 4.20..i bought june calls @ 3.00 w an ask price of 1.40..i bought 5 contracts each..i do not understand it asking for my limit price..originally i placed it at the 4.20 stock price but it stated that it had to be in .1 increments so i then used the ask price n it completed..on the second order i used a number .05 cheaper than the ask price n it cleared? later i practiced w that limit number n it accepted right down to .10? i did notice that the price of the transaction was very small but declaring the limit price has me confused n want to understand it before i make anymore options trades..
thanks, steve

Joey April 21st, 2014 at 11:28am

Hello Peter,

I have question concerning two long call positions I'm attempting to open.

I normally Buy to Open, slightly in-the-money, at the Bid price.

I am noticing that it takes time for my orders to leave the Open status and become active.

Does this mean that my limit price set at Bid is too low? What would you reccommend in this scenario? Increase my limit closer to or at the ask price?

I missed the opportunity of gaining a few points because of my order not activating, I also run the risk of the order getting processed too late (before a reversal).

Much appreciated,
Joey

Joey April 12th, 2014 at 12:21pm

Thanks a bunch Peter you explained it perfectly.
I seem to have a fairly succesful strategy in the making. I'm operating out of a virtual account at the time and plan to go live by July.
I don't see there being too many differences between the virtual and actual, but any advice you have will be welcomed. :)
Take care,
Joey

Peter April 11th, 2014 at 5:20am

Hi Joey,

Thanks for posting - although not sure I agree with genius though ;-)

The amount you're seeing, which I assume is $4,400, is the total proceeds you will receive as a result of selling the options i.e. 5 x 8.80 x 100 (100 = multiplier).

The difference between this and your purchase proceeds will be your profit of $900.

Also, this transaction is a closing trade - where you are reversing an existing position. This is different to "exercising" the option. An exercise in your case (long puts) would be to deliver stock (sell shares) to the seller of the put option at the exercise price.

Let me know if you need anything else.

Joey April 10th, 2014 at 12:42pm

Hello Peter,

Thanks for sharing your genius.

I have a question on a PUT position that I am attempting to exercise. I Bought to Open 5 OEX PUTS and I am now in the money. When Selling to Close my preview screen shows that the transaction will cost me over $4,000. Thats more than my original opening transaction and way more then the $900 profit I'm trying to realize.
Could you explain what exactly is taking place?

Here is a copy/paste of that line item:
Action Qty Symbol Desc Contract Size Price Duration All or None
SellToClose 5 OEX AprWk4 820 Put S&P100INDEX 100 Limit 8.80 DayOrder Off

Thanks again,
Joey

Peter March 4th, 2014 at 4:43am

Hi Greg,

If your position in the option is profitable you can simple unwind the position by selling back in the market; you don't have to exercise the option and sell the stock to profit.

If it's moments before expiration then the volatility component will be so small it would be negligible; the option will be trading very close to its' intrinsic value.

Let me know if anything is not clear.

Greg March 1st, 2014 at 11:05am

Peter,

Amazing site...Thank You! A newbie question-

If I buy a long call and the stock price goes up above the strike price is it true that I maximize my profit by simply letting the option expire assuming I have enough margin to buy the underlying stock?

Alternatively, I could sell the option moments before expiration. Would I then make a similar profit, minus a premium for not having to buy the stock?

If so, how big is that primium (controlling for volatility)? Even if the price were guaranteed to remain the same between my sale of the option and its expiration, I must be paying for the luxury of not tieing up my capital in the stock, but how much?

Thanks!
Greg

Peter February 11th, 2014 at 3:35am

Hi Fred,

You should look at Interactive Brokers. You can sell options naked provided your have enough capital to cover if exercised.

Fred February 9th, 2014 at 11:24am

Hi Peter,
I've learned so much from this site! Thank you.
Question: I was told by CITI, that they would only sell me "covered" call/put options. Can you recommend some brokers that will sell me "uncovered" options?
Also, I like a broker that will "assist" me at expiry with my "uncovered" positions
Thanks again

Peter July 16th, 2013 at 6:12am

Hi Phil,

Yep, most likely. However, most brokers also provide leverage with your account - so even though your cash balance is not enough you'll be loaned the excess to cover your position. It does depend on the broker though so best to check with your broker or ask this before openning your account.

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