A long call, also referred to as a buy call, is a trading strategy wherein an investor purchases a call option with the anticipation that the underlying asset's price will increase.
This strategy is often employed in bullish markets or when a trader believes that a specific stock or asset has the potential for substantial upward movement. By buying the call option, the trader pays a premium upfront for the right, but not the obligation, to buy the asset at the predetermined strike price before the option expires.
BULLISH OUTLOOK
The long call strategy is employed when an investor has a bullish outlook on the underlying asset.
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It's an expectation that the asset's price will rise.
LIMITED PROFIT POTENTIAL
In a long call position, the investor's risk is limited to the premium paid for the call option contract.
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This makes it a defined-risk strategy.
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Conversely, the profit potential is theoretically unlimited, as the price of the underlying asset can rise significantly."
NO OBLIGATION TO EXERCISE
As the buyer of the call option, you have the right but not the obligation to exercise it.
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If market conditions are not favorable, you can let the option expire, and your loss is limited to the premium paid.
PROS | CONS |
Limited Risk: The risk is limited to the premium paid for the call option. This provides a clear and defined maximum loss for the investor. | Limited Time Frame: Call options have expiration dates, and time decay can erode the value of the option as it approaches expiration. If the market doesn't move in the expected direction within the given time frame, the option may lose value. |
Unlimited Profit Potential: The profit potential is theoretically unlimited as the underlying asset's price can rise significantly, allowing the investor to benefit from the appreciation | Cost of Premium: The investor must pay a premium to enter into a long call position. If the market doesn't move favorably, the premium paid is a loss. |
No Obligation to Exercise: As the buyer of the call option, you have the right but not the obligation to exercise it. This flexibility allows you to choose whether to capitalize on the opportunity. | Market Timing is Crucial: Timing is critical in a long call strategy. If the underlying asset doesn't move as anticipated within the expected time frame, the option may expire worthless. |
Risk of Volatility: While volatility can increase option premiums, excessive volatility can also increase the risk of unexpected price swings and market turbulence. | |
Possibility of Losing Entire Premium: If the market doesn't move as expected, and the option is not exercised, the investor may lose the entire premium paid for the call option.
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LONG CALL AND OPTION ASSIGNMENT
There is no assignment risk for the buyer (holder) of a long call option.
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Assignment risk refers to the possibility that the option seller (writer) may be required to fulfill their obligation under the options contract.
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So, for a long call strategy, the buyer has control over whether to exercise the option or not, and there is no risk of being assigned the obligation to buy the underlying asset.
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Assignment risk is more relevant for the seller (writer) of options, especially for strategies like covered calls, where the investor sells call options against an existing long stock position.
LONG CALL EXAMPLE
Suppose an investor holds a bullish view on the SPDR Dow Jones Industrial Average ETF Trust (DIA) for the upcoming nine days. Envisioning the stock's current trade at $347.47 per share, the strategy chosen to express this bullish outlook involves the execution of a long call strategy. In this scenario:
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Buys for $2.46 one call option with a strike of $347.50 expiring in nine days
This strategic move results in a net debit of $2.46 for the single option, derived from the purchase of the $2.46 debit. Considering the standard equivalence of one options contract to 100 shares of the underlying asset, the overall debit accumulated stands at $246.
MAXIMUM PROFIT SCENARIO
Suppose DIA experiences an uptrend, reaching $349.96 or above at the time of expiry. This results in the attainment of a potential profit, amounting to an unlimited amount. This is obtained from the final stock price subtracted from the strike of the call position, and then multiplying the result by the number of shares (100) subtracted by the total premium paid ($246). Hence, $349.96 subtracted by $347.50 multiplied by 100 shares equals the breakeven of $246 - premium paid ($246) is equal to the $0 or the breakeven at expiry.
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(Final Stock Price − Strike Price) × 100 Shares − Total Premium Paid
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($349.96 - 347.50) * 100 - $246 = $0
It's important to note that once the stock surpasses the strike price, the strategy continues, and unlimited profit will continue to accrue beyond this point.
MAXIMUM LOSS SCENARIO
Should the DIA shares hover at $347.50 or fall below the designated strike, the maximum loss comes into play. Yet, this loss will plateau at the cost of the strike until the position is closed and then multiplied by 100 shares.
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Capped Potential Loss
The investor's undesirable scenario envisions the stock concluding below the $347.50 per share mark upon expiration, thus marking the potential loss for this investor of a capped loss of $246.
BREAKEVEN POINT
For a long call, the breakeven point is calculated by adding the net premium paid to the lower strike price.
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Strike Price: $347.50
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Net Premium Paid: $2.46
Therefore, the breakeven point of $349.96 per share indicates that for the long call spread strategy to be profitable at expiration, the price of DIA must exceed this level. Below $349.96, the investor faces potential losses, with losses capped at the net premium paid of $246 if DIA remains at or below $347.50.
The long call strategy is a powerful tool used by investors expecting significant upward movement in the price of an underlying asset. By purchasing a call option, they secure the right to buy the asset at a predetermined price, while their risk is limited to the initial premium paid. This strategy offers unlimited profit potential if the asset's price rises substantially, without the obligation to exercise the option if market conditions are unfavorable. Whether you're anticipating bullish market trends or seeking to benefit from potential price appreciation, the long call strategy provides flexibility and defined risk in navigating the dynamics of the options market.
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- Long Call. www.optionseducation.org/strategies/all-strategies/long-call.
- Long Call - Speculative. www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/longcall-speculative.
- “Option Strategy Spotlight: Long Call Vs. Bull Call Spread.” Schwab Brokerage, www.schwab.com/learn/story/option-strategy-spotlight-long-call-vs-bull-call-spread.
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