The Long Call is a basic options trading strategy that allows an investor to benefit from a potential increase in the price of an underlying asset, such as a stock. It involves purchasing a call option, which gives the buyer the right, but not the obligation, to buy the underlying asset at a predetermined price (known as the strike price) on or before a specified date (known as the expiration date).
How the Long Call Works:
- A call option is like a special contract that gives you the right to “call” or buy the underlying asset at the strike price.
Buying the Call Option:
- When you implement the Long Call strategy, you buy a call option from the options market.
- By purchasing the call option, you pay a premium (the price of the option) to the option seller.
Profit Potential:
- The Long Call strategy profits from a rise in the price of the underlying asset.
- If the price of the underlying asset increases above the strike price before the expiration date, the call option becomes valuable.
Example:
- Let’s say you are interested in a technology company’s stock, ABC Inc., which is currently trading at $100 per share.
- You believe that the stock price will go up in the next few weeks due to positive news about the company’s new product launch.
- To take advantage of this potential price increase, you decide to use the Long Call strategy.
- You buy one call option contract with a strike price of $100 and an expiration date one month from now.
- For this call option, you pay a premium of $5 per share, which means a total premium of $500 (since one option contract represents 100 shares).
Profit Scenario:
- If the stock price of ABC Inc. goes up as you predicted and reaches, let’s say, $110 per share before the expiration date, your call option becomes valuable.
- You can exercise your right to buy the stock at the $100 strike price, even though the market price is now $110.
- Your profit will be the difference between the stock’s market price and the strike price, minus the premium you paid for the call option.
- In this case, your profit would be $110 – $100 (strike price) – $5 (premium) = $5 per share. Since one option contract represents 100 shares, your total profit would be $500.
Risk Scenario:
- If the stock price of ABC Inc. does not increase or falls below the strike price of $100 before the expiration date, the call option may not be profitable.
- In this situation, you would lose the premium you paid for the call option, which is the maximum amount you can lose in the Long Call strategy.
Remember, options trading involves risks, and it’s essential to understand the potential outcomes and have a clear trading plan before engaging in any options strategy. The Long Call is a bullish strategy, meaning it benefits from a rising market, but it also carries the risk of a limited loss if the stock price does not move in the expected direction.