Long Call Option Strategy

‌A long call option strategy entails purchasing a call option by itself. Investors with an investment objective of growth and speculation utilize the long call option strategy. A call option gives the investor the right to buy a stock at the strike price within a specified time-period. The call option gives the investor flexibility to purchase the stock at a later point in time if it does appreciate in value.

For this, the investor pays a premium for a call option which gives the right to purchase 100 shares of stock. While there’s theoretically infinite upside potential in purchasing a long call option, the investor stands to lose the entire amount invested in the long call option strategy before or by the expiration date if the underlying stock underperforms.

A long call option strategy therefore requires a considerable level of risk tolerance An investor who has a bullish outlook that anticipates the stock price to rise beyond a certain price by a set-date utilizes a long call option strategy.

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Let’s See an Example:

An investor anticipates that stock price of IOIO will go up in the next 3 months. IOIO trades at $10 while a 3 month call option with the $10 strike price trades at $2.

The investor buys one IOIO call option at the $10 strike price with 3 months until the expiration date for a premium of $2.

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The maximum potential profit is theoretically infinite since the price in theory could continue to rise to any price. This is calculated as follows:

Maximum Profit per Option = (Theoretical Infinite Price – Call Option Strike Price - Premium) x 100 shares

$∞ = ($∞- $10 - $2) x 100 shares

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The maximum potential loss is the $2 premium paid for the call option multiplied by 100 shares. This is calculated as follows:

Maximum Loss per Option = Premium Paid x 100 shares

$200 = $2 x 100 shares

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The break-even point is the $10 strike price of the option plus the $2 price of the premium paid. This is calculated as follows:

Break Even Point = Strike Price + Premium Paid

$12 = $10 + $2

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The profit and loss of the long call option strategy until expiration date is depicted in the chart below.

The chart shows the potential profit and loss on the y-axis versus the corresponding stock price in the x-axis until expiration date.

If IOIO trades up to $12 and beyond the long call will be profitable. Theoretically, an investor with a long call has infinite profit potential as the price can reach any level. Conversely, the maximum potential loss is $200, which is the premium the investor paid for the call option. The breakeven point is $12 which is the strike price of $10 plus the premium paid of $2.

If IOIO is above $10 and the investor has enough equity to exercise the call option, he can purchase 100 shares of IOIO for $10 a share. He can exercise the option at any time IOIO trades above $10. However, he only breaks even on his call option strategy if the price of IOIO breaks $12. If by expiration date, the price is above $10, and there is enough equity in the investor’s account to exercise the call option, the option will be automatically exercised, resulting in 100 shares long of IOIO at $10 as of the next trading day. Conversely, if the investor does not wish to purchase shares of IOIO or does not have enough equity to purchase the shares, he can instead sell the call option before expiration date at a profit.

If the stock price of IOIO fails to stay above $10 by expiration date, the call option will eventually expire worthless, and the investor loses his entire amount of $200 invested.