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Long Call Options Trading Strategy Explained

Published on 4/17/2018 3:15:06 AM | Modified on Wednesday, August 8, 2018

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Long Call
Long Call Options Strategy
Strategy LevelBeginners
Instruments TradedCall
Number of Positions1
Market ViewBullish
Risk ProfileLimited
Reward ProfileUnlimited
Breakeven PointStrike Price + Premium

A Long Call Option trading strategy is one of the basic strategies. In this strategy, a trader is Bullish in his market view and expects the market to rise in near future. The strategy involves taking a single position of buying a Call Option (either ITM, ATM or OTM). This strategy has limited risk (max loss is premium paid) and unlimited profit potential.

When the trader goes long on call, the trader buys a Call Option and later sells it to earn profits if the price of the underlying asset goes up.

When the trader buys a call, he pays the option premium in exchange for the right (but not the obligation) to buy share or index at a fixed price by a certain expiry date. This premium is the only amount at-the-risk for trader in case the market moves in other direction (price of underlying asset falls).

In this strategy, we first buy a call and then close out the position later. This strategy should not be confused with 'Naked Call' where we sell calls and then buy them back at a cheaper price.

When to use Long Call strategy?

A long call Option strategy works well when you expect the underlying instrument to move positively in the recent future.

If you expect XYZ company to do well in near future then you can buy Call Options of the company. You will earn the profit if the price of the company shares closes above the Strike Price on the expiry date. However, if underlying shares don't do well and move downwards on expiry date you will incur losses (i.e. lose premium paid).

Example

Example 1 - Bank Nifty

Buy 1 Call Option of Bank Nifty
Bank NiftySpot Price ₹8900
Lot Size: 1 contract = 25Strike Price ₹8800
Premium ₹500
Breakeven ₹
(Strike Price + Premium)
9300
Scenarios
Bank Nifty on expiry ₹Premium Pay-off ₹
(Premium * Lot Size)
Exercise Pay-off ₹
(Expiry Price - Strike Price) * Lot Size
Net Pay-off ₹
(Exercise + Premium Payoff)
8800-125000-12500
9000-125005000-7500
9200-1250010000- 2500
9400-12500150002500
9600-12500200007500
Long Call Options Example - Bank NIFTY

Example 2 - NIFTY OPTIONS

Suppose you are bullish on Nifty today when the Nifty is trading at 10, 550. You can implement a long call strategy by buying a call option with a strike price of 10,750 at a premium of ₹40. If the Nifty goes above 10,790, you will make a net profit on exercising the option. In case the Nifty stays at or falls below 10,750, you will make a maximum loss of the premium paid.

Buy 1 Call Option of Nifty
Current Nifty₹10,550
Strike Price of Call Option₹10,750
Premium Paid40 X 75= ₹ 3000
Break Even Point (Strike Price + Premium)₹10,790
Lot Size75
Long Call Strategy Payoff Schedule
Nifty on Expiry (₹)Net Payoff (₹)
(Strike Price - Break Even Point) * Lot Size
10,200-3000.00
10,300-3000.00
10,400-3000.00
10,500-3000.00
10,600-3000.00
10,7900.00
10,800750.00
10,9008,250.00
11,00015,750.00

Note: Break Even Point is 10,790. The maximum loss cannot be greater than ₹40 premium paid.

Long Call Options Example - NIFTY

Market View - Bullish

When you're expecting a rise in the price of the underlying and increase in volatility.

Actions

  • Buy Call Option

A long call strategy involves buying a call option only. So if you expect Reliance to do well in near future then you can buy Call Options of Reliance. You will earn a profit if the price of Reliance shares closes above the Strike price on the expiry date. However, if Reliance shares don't move up within the expiry date you will incur losses.

Breakeven Point

Strike Price + Premium

The break-even point for Long Call strategy is the sum of the strike price and premium paid. Traders earn profits if the price of the underlying asset moves above the break-even point. Traders loose premium if the price of the underlying asset falls below the break-even point.

Risk Profile of Long Call

Limited

The risk is limited to the premium paid for the call option irrespective of the price of the underlying on the expiration date.

Max Loss = Premium Paid

Reward Profile of Long Call

Unlimited

There is no limit to maximum profit attainable in the long call option strategy. The trade gets profitable when price of the underlying is greater than strike price plus premium.

Profit = Price of Underlying - (Strike Price + Premium Paid)

Max Profit Scenario of Long Call

Underlying closes above the strike price on expiry.

Max Loss Scenario of Long Call

Underlying closes below the strike price on expiry.

Advantage of Long Call

Buying a Call Option instead of the underlying allows you to gain more profits by investing less and limiting your losses to minimum.

Disadvantage of Long Call

Call options have a limited lifespan. So, in case the price of your underlying stock is not higher than the strike price before the expiry date, the call option will expire worthlessly and you will lose the premium paid.

How to exit?

  • Sell the Call on profit before expiry
  • Wait for the Call to expire
  • Exercise the Call to buy the underlying

Simillar Strategies

Protective Put, Covered Put/Married Put, Bull Call Spread

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