Option-Info.com 

The In-the-Money Long Call Option Strategy can participate in stock gains similar to the stock itself and offers limited downside risk.

Home

Option Trading Subjects:

Search option-info and options-graphs sites:
Custom Search

 

 

Strategy: Long Call, In-the-Money

Long Call In the Money Option Graph

The Outlook: Bullish. The stock must rise by as much as the time value bought to have a gain. (The time value is the amount over the intrinsic value. In the example call with the stock at 50, the 45 strike has an intrinsic value of $5.00, and the time value is .39).

The Trade: buy call(s), using the next strike price below the current stock price.

Gains when: stock rises enough by the expiration date to overcome the time value portion of the call price.

Maximum Gain: unlimited.

Loses when: stock goes down, does not rise, or does not rise enough by the expiration date.

Maximum Loss : limited to the initial debit.

Breakeven Calculation: Strike Price bought + Initial Debit.

Advantages compared to stock: less capital required, increased leverage, "built-in" stop loss.

Disadvantages compared to stock: greater risk of 100% loss of the capital invested, no dividends, limited life, slightly more stock movement needed to be profitable.

Volatility: after entry, increasing implied volatility is positive.

Time: after entry, the passage of time is negative.

Margin Requirement : None. Initial debit must be paid in full.

Variations: Long Call, ATM; Long Call OTM.

Synthetic Equivalent: Long Stock plus Long Put at the strike used for the ITM call.

Comments

  • Buying an In-the-Money call is the only long call in which you are actually buying intrinsic value. In the example stock, if the call expired the moment you bought it, it would still be worth $5.00, because the stock is at $50 and the strike price bought is 45. If you buy ATM or OTM long calls, you are basically buying the hope or expectation that they will go higher, but no intrinsic value.
  • ITM long calls usually have a Delta of anywhere from about .6 to 1, depending on how far ITM they are. This means for every dollar move up or down in the stock, the option may gain or lose about .60 to $1.00. Thus, deep ITM long calls with Deltas approaching 1 can be used as long stock substitutes by stock investors. See the Options Greeks page for more information about Delta.
  • Like all long calls, ITM long calls have a "built-in" stop loss. You can only lose as much as the call cost.
  • For the two reasons above, ITM long calls can be used instead of stock, to buy possible "breakouts", using much less capital than buying stock. If he wishes, the investor can then exercise the calls to buy the stock on breakouts that work, and take the built in "stop loss" of whatever the option is worth at expiration, on the breakouts that fail.
  • A trader wanting to make less of a dollar investment might want to use ATM calls instead. A trader expecting a dramatic bullish price move any day might use OTM calls expiring soon. See the ITM, ATM, OTM? page for more information.

Exits

  • Since this is a 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, taking less than the maximum possible loss.
  • If the trader is still bullish on the stock but feels he may have missed on the timing, the currently held long call can be "rolled" to one expiring in a later month. The currently held call will still have some value, which will help offset the cost of the new call.
  • If the stock moves higher as expected, the trader can take gains by selling the call at a higher price, rolling out to a later month, or exercising the call to buy stock at the strike price.

Adjustments

  • Since a long call is a component of many other option strategies, a long call position can sometimes be adjusted or converted to those strategies.

Important disclaimer. Copyright 2017 option-info.com Privacy

Questions, corrections, suggestions, comments to: this contact

Interested in option calculators or option graphing software? Visit www.option-graph.com