Call, At-the-Money, is one of the most commonly used bullish option strategies.
option-info and options-graphs sites:
Outlook: very bullish. The stock must have a good percentage move
by expiration for the call to break even. For a gain, the stock must move
buy call(s), using the strike price nearest the current stock price.
when: stock rises enough by the expiration date to overcome the initial
when: stock goes down, does not rise, or does not rise enough by
the expiration date to overcome the initial debit.
Loss : limited to the initial debit.
Calculation: Strike Price + Initial Debit.
compared to stock: less capital required, increased leverage, "built-in"
compared to stock: greater risk of 100% loss of the capital invested,
no dividends, limited life, more stock movement needed to be profitable.
after entry, increasing implied volatility is positive.
after entry, the passage of time is negative.
Requirement : None. Initial debit must be paid in full.
Long Call, ITM; Long Call OTM.
Equivalent: Long Stock plus Long Put, ATM.
- ATM long
calls with at least a month to expiration can be used by "swing
traders" trying to catch dips in an uptrending stock, with a one
or two week holding period and a rise in the stock expected during that
- ATM long
calls can be used by day traders trying to catch oversold points during
a day's trading.
Because the ATM long call will have a Delta of about .5, the day trader
can possibly get about half the gain of the stock itself from that point,
on much less investment.
- ATM long
calls can be used by stock investors to buy possible "breakouts",
using much less capital than buying stock. The investor can then exercise
the calls on breakouts that work, and cut their dollar loss to less
than buying stock on the breakouts that fail.
- A trader
expecting the stock to have a nice uptrend over time might want to use
ITM calls instead, and a longer time to expiration. A trader expecting
a dramatic bullish price move any day might use OTM calls expiring soon.
See the Choosing a Long Option Strike
Price page for more information.
this is a very bullish position, the trader is obviously expecting the
stock to move higher. If the stock does not move higher, and the time
to expiration gets to just a couple weeks, it is usually wise to exit
the trade. In the position graph you can see the green time line showing
that the position has lost about $60 if the stock stays at 50 for the
first fifteen days, or a loss of about 30% on the $198 invested. If
the trader continues to hold the position at that stock price until
expiration, the loss would jump to more than three times that much,
the entire $198 investment.
a long call is a component of many other option strategies, a long call
position can sometimes be adjusted or converted to those strategies.
For instance, if the stock rises, the trader can sell a call at a higher
strike price, turning the position into a bull
call in order to reduce his downside risk (but also reduce his gains
if the stock rises higher than the sold strike).