Long call options allow an investor to bet that the underlying stock will rise in value or remain above the strike price. It is one of two bull option contract types, the other selling put option contracts. The long call option strategy allows traders to make a profit without all the risks associated with owning the stock. Since calls are less expensive than stocks, a trader can take advantage of more stocks than they can with stocks.
Long call option strategy
A trader must be careful when buying out-of-the-money short term calls. They can be attractive to new traders because they are cheap to buy. But often a losing attempt is being made. Remember, the life span of a call option is relatively limited because there is a risk that the stock will not rise above the strike price in time to make any profit. And the option may expire until it is worthless.
In the chart above, holders of call options do not begin to cut their costs until the stock price reaches the strike price, represented by point a. They initiate stock profit when the stock equals an amount greater than the strike price at a premium paid for the call.
How do a long call option work
An investor who buys a call option has the right to purchase the stock at the strike price until the option contract expires. In most cases, an option contract gives the call option holder the right to purchase certain shares of stock. As the value of the underlying asset increases. So do the call option. Holders of call options can either use the contract and take delivery of the stock or sell the call option before the expiration date.
To purchase a call option, the buyer must pay a premium. Which represents the price paid for the right to purchase the stock at a predetermined price. Unlike stocks, which can sustain a drop in value and accumulated losses for the investor, purchasers of a call option can only lose the premium they paid, regardless of how far the stock is.
If the stock price is above the strike price at expiration. The gain / loss is calculated by taking the stock price and then subtracting the strike price and the premium paid, then multiplied by the number of controlled shares.
Maximum loss = Net premium paid
The maximum benefit for a long call strategy is unlimited as the stock can continue to gain more and more value.
The break is calculated on the long call option by adding the premium to the strike price.
If a stock is trading at 100 and an investor wants to buy a 110-strike price call for 5, then Brexit would be 115.
If price expires below 110 then all premium will be worthless
Long call is an investment practice that allows the investor to place bets on the stock’s growth. The investor should be able to handle the potential loss of the entire premium if it goes wrong. A trader can earn a lot more through call ownership than the stock owner. But the risk of losing is also very high