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Long Call Options Trade/Strategy-How to Manage and Track

 

What are Long Call Options?

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A long call option strategy is purchasing a call option with the expectation that the underlying stock will rise. Long call options strategies will necessarily be delta and theta positive. Long call options positions are significant for both seasoned and novice traders because they can be initiated with defined risk and possess excellent profit potential.

What is the strategy?

A long call option position is also called a bullish call option position. Like all call options, these are also derivatives that a buyer has the right to buy but no obligation. Options have

an expiration date. Beyond this date, the option will either be “in the money,” meaning that it has been exercised, or it will be “out of the money,” meaning that it has expired and is now worthless.

Long call option graph

 

So, who should invest in long call options?

  • Traders who are bullish about a particular stock, ETF or, index and want to minimize their risk factor.
  • Traders who wish to make use of leverage to take advantage of rising stock prices.

Options are essentially leveraged instruments; that is, they provide traders with the opportunity to benefit significantly by risking smaller amounts than would otherwise be risked if trading were carried out with the underlying asset itself.

Let us take an example to understand better:

Suppose you bought a long call option on a stock that is trading at $49 per share at a $50 strike price. You are betting that the stock price will go up and above $50 within the expiration date. In this example, the long call you are buying is “out of the money”, so it will be cheaper. This is an excellent strategy to play when one is bullish on a particular stock.

how to manage Long Call Option
How to manage Long Call Options

Long call options formula

While calculating profit or loss at the end of the trade, it is crucial to understand the formula to use. Supposing you make a profit in your trade, the formula you must use is:

Profit=Price of the underlying asset/security – Premium paid – Strike Price 

However, in case you make a loss at the end of your trade, you use the formula:

Loss= Premium + Brokerage + Taxes paid

Pros of Strategy

A bullish call position’s most significant advantage is its defined risk characteristic. After purchasing a call option, the buyer’s risk becomes limited to the premium paid, regardless of the market’s movements. A call option is better suited for larger returns on investment in the long run because it requires lesser investment capital. A call option thus profits from volatility while protecting against significant losses.

Cons of Strategy

Before investing in long call options, it is essential to consider the risks involved. Since call options have a fixed expiration date, they tend to lose value over time. An option may lose value even if the market moves positively if there are low levels of volatility. Thus, long call options investors have to be correct, not only about the timing of making the purchase but also about the market’s expected volatility conditions.

Managing Risk

A simple but highly effective method of managing risk when it comes to call options is understanding when to “cut” the option if it loses half its value. Another effective strategy is to “cut” the option when it reaches a certain time before its expiration(e.g., Suppose a trader buys an option with 90 days until expiration, it is a good idea to cut the option after 60 days).

Long options also have the advantage of being adjusted during the trade itself. A trader holding a long call option that is showing a profit but is nearing its expiration date may sell the option back to the market and “roll” out by purchasing a different call option with a later expiration date.

Another possibility is to sell a short call option against a bullish call option once the position has become profitable to lock in a profit.

Tracking volatility to mange Long Call Options
Tracking volatility to mange Call Options

Bottom Line

Long call options are one of the most exciting and highly profitable areas of modern finance. Market players can use them to achieve profits manifolds over the initial investment, and they allow traders to create complex market positions that wouldn’t have been possible using traditional securities. Call options allow buyers to capture all of the upsides of a share for a small percentage go the share price.

However, dealing with call options may be tricky and may lead to losses if the market is not appropriately studied.

A long call option strategy should be used when you are bullish on a particular stock. It is one of the easiest options to trade and should be a part of every trader’s arsenal.

Disclaimer

None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. 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. The article is written to help users collect the required information from various sources deemed an authority in their content. The trademarks, if any, are the property of their owners, and no representations are made.

References:

https://www.investopedia.com/articles/active-trading/040915/guide-option-trading-strategies-beginners.asp 

https://epsilonoptions.com/long-call/#:~:text=A%20long%20option%20can%20also,price%20for%20a%20later%20expiration

 

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