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Options Strategy – Long Call


A Long Call strategy is one of the most straightforward and popular trading options. It involves purchasing a call option, giving the trader the right, but not the obligation, to buy a specific underlying asset at a predetermined strike price before or on the expiration date. This strategy is ideal for traders anticipating a significant rise in the underlying asset’s price.

  • Market Direction: Upward
  • Difficulty: Easy

How It Works

  • Purchase a Call Option: The trader buys a call option for a premium, gaining the right to purchase the underlying asset at the strike price.
  • Market Movement: The trader benefits if the market price of the underlying asset rises above the strike price plus the premium paid.
  • Exercising the Option: If the asset’s price increases significantly, the trader can exercise the option to buy at the lower strike price, sell at the higher market price, and realize a profit.

Example of a Long Call Strategy

You believe that the stock price of Company XYZ, currently trading at $50, will increase shortly. You decide to buy a call option with the following specifics:

  • Underlying Asset: Company XYZ stock
  • Strike Price: $55
  • Premium: $2 per share
  • Expiration Date: 1 month from now

You purchase one call option contract, which represents 100 shares, so your total investment is:

100 shares×$2 (premium)=$200

call options buy example options trading strategy

Scenarios

Stock Price Rises Above Strike Price

If, at expiration, the stock price rises to $65:

  • Exercise the Option: You buy 100 shares at the strike price of $55.
  • Market Value of Shares: $65 x 100 = $6500
  • Cost of Shares: $55 x 100 = $5500
  • Profit: $6500 – $5500 = $1000
  • Net Profit: $1000 – $200 (premium paid) = $800

Stock Price Remains Below Strike Price

If, at expiration, the stock price remains at $50 or drops:

  • The option expires worthless.
  • Maximum Loss: The premium paid, which is $200.

Benefits of Long Call

  • Limited Risk: The maximum loss is limited to the premium paid for the call option.
  • Unlimited Profit Potential: There is no upper limit to the potential profit if the underlying asset’s price rises significantly.
  • Leverage: Requires a smaller initial investment compared to buying the underlying asset outright.

The Long Call strategy is an excellent starting point for traders looking to capitalize on bullish market expectations with limited risk.

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Long Call
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