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 February 2nd, 2012 at 5:34pm
Thanks IA!
IA February 2nd, 2012 at 4:47am
3 years worth of authentic and valuable Q&A. Fantastic work Peter. We can always do with more active market participants in the Options space. Very impressed.
Peter January 31st, 2012 at 4:33pm
Yes, you can sell the option back in the market. The profit depends on the multiplier, however, if it is call option on a US stock then the multiplier will be 100. So your profit will be 1,000 per contract ((30 - 20) * 100).
Rosy January 31st, 2012 at 12:57pm
Hi,
I have bought a call option for feb'13 for a price of 20 on 10th feb. After few days i.e, on 17th the value of that option has increased from 20 to 30. Can I sell my call option at price 30 ?
How much profit I will earn if we exclude the brokrage.
Peter January 20th, 2012 at 10:07pm
Hi Joules, it depends what your objectives are and your view of the stock. If you think the stock has a lot of potential and can rally, say, 20% in the next 60 days then you would be more inclined to look at a strike 10 to 20% out of the money as the price increase on the out of the money calls will be more percentage wise than the in the money options.
Joules January 19th, 2012 at 11:44pm
Peter:
When determining what strike price you want to buy on a call, in your opinion is it best to buy a strike say 50-60 days out that is already in the money...or....should you buy a strike out of the money and hope for the stock to move up to the strike before expiration? Is there a way analyze the best strike for the money?
Joules
Peter January 19th, 2012 at 3:48pm
Hi Tim, yes, you can close out your long position by simply selling back the same amount of option contracts to the market. Then your position will be flat and therefore there won't be anything to exercise or be exercised against.
Tim January 19th, 2012 at 2:37pm
Good afternoon. I recently purchased out of the money purchased put options with an expiration in 30 days. Say the value of the stock is not trading below the strike price (but it's close) within a few days of expiration. Assume the bid-ask premium is higher than when I purchased. Can I close the position without exercising and profit from the spread between initial premium and current premium? If so, would I be liable as a written put if the stock falls below the strike price?
Peter January 8th, 2012 at 10:23pm
Hi Chintan, please have a look at the page on option types.
Chintan Doshi January 6th, 2012 at 5:07am
Please explain me once again the Full Infomation Of Call And PUT Option
Add a Comment