Buying a Call Option
| B/S | Strike | Type | Price |
|---|---|---|---|
| Buy 1 | $45 | Call | $1.29 |
| Net Debit | $129 | ||
A long call option gives the buyer the right to buy the underlying asset at the strike price. The option buyer pays a premium for this right to the seller of the option.
The Max Loss will only ever be the premium that is paid up front to buy the option.
The Max Gain is uncapped and will rise with as long as the underlying price rises.
Characteristics
When to use: When you are bullish on market direction and also bullish on market volatility.
A long call option is the simplest way to benefit if you believe that the market will make an upward move and is the most common choice among first time investors.
Being long a call option means that you will benefit if the stock/future rallies, however, your risk is limited on the downside if the market makes a correction.
From the above graph you can see that if the stock/future is below the strike price at expiration, your only loss will be the premium paid for the option. Even if the stock goes into liquidation, you will never lose more than the option premium that you paid initially at the trade date.
Not only will your losses be limited on the downside, you will still benefit infinitely if the market stages a strong rally. A long call has unlimited profit potential on the upside.
Long Call Greeks
Delta
Gamma
Vega
Theta
201 Comments
Phil July 14th, 2013 at 2:36pm
Peter,
If I buy a call at strike price below current stock price (deep in the money), since I am very bullish.
What if at the expiry day the price of stock is much higher that the strike price but not enough cash balance to exercise and then sell for profit. Will the broker automatically execute and deposit the profit in my account (since I do not have a margin account enough to support the purchase).
Thank you,
Phil
Peter June 23rd, 2013 at 7:25pm
Hi Nick,
That's right - your max loss with a long (purchased) option is limited to the premium paid. This is the same for both calls and puts.
nick June 22nd, 2013 at 8:27am
Peter,
If you long (purchase) a call or put and let them expire is that how you limit your loss and just lose the premium?
I.E.- You buy a call or put option and before the expiration you are at a loss greater than your premium. I have the choice to let the option expire and I will only lose the priemium and not greater than premium?
Furthermore, if I am correct. Does this only apply to long call and puts as oppose to shorts?
Peter May 16th, 2013 at 7:51am
Hi Chad,
Your position will be updated to reflect the change i.e. your number of contracts will be multiplied by 5 but the strike price will be divided by 5. So your effective position after the split has the same exposure as before the split.
Chad May 15th, 2013 at 7:36pm
What if I buy a call option for ABC 425 june 13 but the stock splits 5 for 1?
Peter August 13th, 2012 at 7:51pm
Hi Akin,
Sure, you can find the sheet here.
AKIN August 13th, 2012 at 8:31am
Please, can you provide excel sheet of the detail graph and how you arrived at the figures of the computation
Jason May 1st, 2012 at 12:40pm
Peter,
Is it better to buy a long call at a lower strike price to benefit off the exercise or selling the call option or better to buy a long call with a higher price with a lower call option? I know the risk is much less at a higher price but if you chose the lower strike and the stock doesn't move much you could exercise and hold the stock to sell on the market.
Peter April 23rd, 2012 at 5:54pm
Hi Mike,
Nice work on the puts!
Yes, sounds like you have closed the position by selling back the puts that you owned. Your brokerage statement should show a zero position for this contract now.
Your calls are quite out of the money - so time decay will definitely start hurting your position with only a few weeks to go. AAPL's earnings report is due tomorrow though, so you'd be hoping for a bullish number ;-)
Mike April 23rd, 2012 at 5:09pm
Hi Peter,
I bought option contracts a few weeks ago on APPL, $695 May '12 Calls and $545 May '12 Puts. I don't own the stock.
I sold (Sold to Close) the same Put contract this morning for a profit since the premium went from $9.60 to $18.00. Did I essentially close this position? I think you answered it earlier in another person's question, but I want to make sure that I don't have any more risk there. I decided to take the profit b/c I wasn't sure if it would get this low again. I don't have a risk if it actually gets in the money ($545) since I closed the contract position by selling it, right?
I still own the $695 May '12 call, hoping that it takes off after earnings and I can make a profit. Obviously, time is not on my side, so I should prob look to get out at a certain price and time. I was thinking if it trades sideways up/down with not much change in two weeks, I might be better off just taking a loss and not risk losing the whole premium?
Thanks for the great site!
Mike
Add a Comment