Long Call Option Strategy (Explained With Excel Template)

What is a Long Call Option Strategy?

The long call option strategy is a one-leg strategy, which consists of buying call options. A trader buys a call option because he is bullish on the underlying stock. He bets that the underlying security will move above the strike price before the expiry of the contract.

With a long call option contract, a trader gets a right but not an obligation to buy the underlying stock at a pre-determined price. He pays an amount for this right known as premium. The risk of the long call holder is limited to the premium amount.

He can buy in-the-money (ITM), at-the-money (ATM), out-of-the-money (OTM) call options. The OTM calls’ prices are lesser than the ITM and ATM call options because of their higher probability of expiring worthless.

Let’s built the Long Call Option Strategy in Excel using the MarketXLS template

Section:1- Provide the inputs to establish the strategy

• Provide the Stock Ticker in D5 cell
• Expiry Date in D9 cell
• The strike price of a call option in D11.
• You can see the current share price and upcoming expiry dates for reference. Here we have bought the one $135 call option of AAPl stock expiring on 19-02-2021.

Section:2- Setup of the long call option strategy

• Bought 1 $135 call option for $1.85.
• 1 contract = 100 shares.
• Outflow of capital = $185 (1.85*100).

Section:3 – Payoff profile and diagram

Profit Potential The call buyer enjoys unlimited profit potential. He gains profit only if the call option becomes ITM; that is, the stock is trading above the strike price on or before the expiration. Profit = Spot price – Strike price – Premium paid.

In the above example, let’s suppose the stock reaches $140, the stock moves up by $5, so the buyer will get $5 on each share, but he paid a premium of $1.85 on acquiring the right. So his net gain on each share is $3.15. Therefore, the total income on the contract equals $315.

Limited Risk The risk of the call buyer is limited to the premium amount paid. If our prediction goes wrong and the stock moves in the opposite direction, we will suffer limited loss. No matter how much the stock falls, the long call holder cannot lose more than the premium amount. So, the risk is capped in this strategy. Maximum loss = premium Paid.

Break-even Break-even is the point of no profit and no loss. The break-even attains if underlying stock closes at the long call option’s strike price plus the premium amount. In the above example, Break-even is achieved at $ 136.85 ($135 + $ 1.85).

Impact of Option Greeks

Delta Delta measures the change in option value with a corresponding change in the underlying asset price. long call options delta is positive, which means if the underlying stock price increases, the call option’s value will also rise. The value of delta ranges from 1 to -1; for long call buyers, the delta value remains between 0.5 to 1. The higher the delta in the long call option strategy greater will be the possibility of profits.

Theta Theta negatively impacts the long call option. It measures the time value of the contract. It refers to changes in the value of an option with changes in time. This concept is called time decay. It means the option contract loses its value for each passing day. The value of theta increases as the contract approaches the expiry.

Vega Vega is a sensitivity of the volatility. It measures the change in the value of the option with a 1% change in the volatility. Volatility measures how far the stock moves on either side. So, the vega has a positive impact on the long call. Therefore, the higher the volatility, the more likely the price will be to move above the strike price.

Conclusion The long-call option is a basic strategy. It is suitable for beginners as it involves limited risk with maximum profit potential. The traders can generate significant returns on their capital because of the leverage. You can even square off the position before the expiration and can safeguard your profits.

Disclaimer

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The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein.

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Reference

To know more about options trading, click here.

To know more about Options Greeks, click here.