The OTM long
call strategy has the highest reward to risk ratio of any long call, but
also the lowest probability of success.
option-info and options-graphs sites:
Outlook: Extremely bullish. At expiration, the stock must have risen
by the amount of the OTM strike price, plus the initial debit, just for
the option to break even. It must have risen more for the option to show
buy call(s), using the next strike price above the current stock
when: stock rises enough by the expiration date to overcome the higher
strike price and the initial debit.
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: much less capital required, vastly increased leverage,
"built-in" stop loss.
compared to stock: much greater risk of 100% loss of the capital
invested, no dividends, limited life, 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, ITM; Long
Equivalent: Long Stock plus Long Put at the strike used for the OTM
an Out-of-the-Money call is the least expensive long call, and the least
likely to show a gain at expiration.
- OTM long
calls are used by speculators expecting a quick upward move in a stock.
A speculator who gets the timing right can double his investment in
a day or two.
- OTM long
calls can be used to "bottom fish" in a stock or index ETF,
at much less dollar cost than buying the stock or ETF.
If the speculator really is buying the bottom, the percentage gains
can be substantial.
- OTM long
calls can be used to speculate
on possible big moves at earnings time. If the speculator is correct,
large percentage gains are possible. If wrong, the dollar loss is relatively
low and limited.
- Like all
long calls, OTM long calls have a "built-in" stop loss.
You can only lose as much as the call cost.
- A trader
wanting a better probability of the option ending up In-the-Money might
want to use ATM calls instead. A trader wanting the best probability
of a gain nearly dollar-for-dollar with a rise in a stock might want
to use ITM calls instead. See the ITM,
ATM, OTM? page for more information.
this is an extremely bullish position, the trader is obviously expecting
the stock to move much higher. If the stock does not move high enough,
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.
since this is a very low cost and speculative position in the first
place, it is not inconsistent with that strategy to just hold on until
expiration. Just like gambling, every once in a while there might be
a big winner if you stay in the game.
- If the
stock moves higher as expected, speculators usually take gains by selling
the call at a higher price. However, they can also roll out to a later
month, or exercise 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.