Long Call Option Strategy can participate in stock gains similar to the
stock itself and offers limited downside risk.
option-info and options-graphs sites:
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).
buy call(s), using the next strike price below the current stock
when: stock rises enough by the expiration date to overcome the time
value portion of the call price.
when: stock goes down, does not rise, or does not rise enough by
the expiration date.
Loss : limited to the initial debit.
Calculation: Strike Price bought + 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, slightly more stock movement needed to be
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, ATM; Long Call OTM.
Equivalent: Long Stock plus Long Put at the strike used for the ITM
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.
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
- 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.
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.
a long call is a component of many other option strategies, a long call
position can sometimes be adjusted or converted to those strategies.