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Long call
Long call is a one-legged, risky, bullish option strategy with limited risk. Buying a call option is an alternative to buying stocks with leverage. The chart below shows a long call option strategy with a strike price of 100 and a price of 5 and a profit/loss diagram.
Greeks and this strategy
| Greek | How it behaves |
|---|---|
| Delta | Positive. The position gains value when the underlying rises; delta approaches 1 as the call moves deeper in the money. |
| Theta | Negative. Time decay erodes the long call premium each day unless the stock rallies enough to offset it. |
| Gamma | Positive. Delta increases as the stock rises and decreases as it falls, accelerating gains on favorable moves near the strike. |
| Vega | Positive. Higher implied volatility raises the call premium; falling volatility hurts the position. |
Overview of long call
Long call options give the buyer the right, but not the obligation, to buy stocks of the underlying asset at the strike price within or before expiration. Since options are leveraged investments, each contract is equivalent to owning 100 stocks (relevant for the US market). The advantage of using a long call option is that it requires less capital compared to the costs of owning 100 stocks, and the risk of loss is limited to the cost of the option contract.
Market prospects of long call
A long call is bought when the buyer believes that the price of the underlying asset will rise by at least the cost of the option at expiration. Further out-of-the-money (OTM) strike prices will be cheaper, but with a lower probability of success. The further the strike price is out of the money, the more bullish the trader is, buying a call option. But the potential profit in this case is much higher.
How to open a long call position
The position of a long call is opened when the buyer buys a call option contract. Calls are listed in the option desk and provide the corresponding information for each strike price and available expiration time, including the bid and ask prices. The cost of entering into a trade is called the premium. Market participants consider several factors to assess the value of an option premium, including the strike price relative to the stock price, time to expiration, and volatility.
Profit/loss diagram for a long call
The profit/loss diagram for a long call is simple. The maximum risk is limited to the cost of the option. The potential profit is unlimited. To break even at expiration, the stock price must rise above the strike price by the cost of the long call option. For example, if a long call option with a strike price of $100 is purchased for $5.00, the maximum loss is determined to be $500, and the potential profit is unlimited if the stock continues to rise. However, the underlying stock must be above $105 at expiration to realize a profit.
How to enter a long call position
To enter a long call position, a buy order (BTO) is sent to the broker. The order is either executed at the ask price (market order) or at a specific price that the investor is willing to pay (limit order). Buying a call option results in a deduction of funds from the trading account.
How to exit a long call position
There are several ways to exit a long call position. At any time before expiration, a sell order (STC) can be entered, and the contract will be sold at the market price or at a limit price. The premium received from the sale will be credited to the account. If the contract is sold for a higher premium than the initial purchase, a profit is realized. If the contract is sold for a lower premium than the initial purchase, a loss is realized. If the long call option is in the money (ITM) at expiration, the holder of the contract can exercise the option and receive 100 stocks at the strike price. If the long call option is out of the money (OTM) at expiration, the contract expires worthless, and a full loss is realized.
The impact of time decay on a long call
The remaining time to expiration and implied volatility constitute the extrinsic value of the option and affect the price of the premium. Under the same conditions, option contracts with a longer time to expiration will have higher prices because there is more time for the option to be in the money (ITM, in the money).