Long Call

A long call is one of the simplest option strategies, and involves buying (going long) a call option. Long calls are generally used by traders speculatively who believe that the underlying asset will increase in value.

Many traders who buy calls and use this strategy will rarely exercise their rights, and instead will sell the option contract back into the open market prior to expiry day. If you wish to exercise the call, remember to have enough cash set aside for 100 shares at the strike price.

For example: If you own a call option with a strike price of $20 with a few days until expiration, and the stock is trading at $25, you could choose to sell the option back into the market for the intrinsic value of $5 [calculated as $25 (share price) - $20 (strike price)] plus any minimal time value left.

Strategy benefits

• Speculate on price increases with a lower cost basis than buying the underlying itself (in most cases).
  • For example: It is often cheaper to buy a call option than to buy 100 shares of the stock or ETF. If the price increases significantly, the call option will typically increase in value more in percentage terms compared to owning the underlying itself.
  • This is due to the “built-in” leverage of option contracts since 1 contract represents 100 shares of the underlying.
• Take on less downside risk than by owning the underlying itself.
  • The maximum loss is always the entire premium you paid for the option, but this is often cheaper than buying 100 shares of the underlying and having it decline significantly in value.
  • Call options with shorter times until expiration cost less since they have less time value, but are much riskier since the chances of expiring worthless are much higher. This is especially true for very “far” out of the money options.

Strategy downsides

• Your call option may expire worthless before your anticipated price increase.
  • If you’re speculating by buying calls, and the stock price is lower than your strike price at expiration, the call will expire worthless.
  • Even if your strike price is lower than the price per share of the underlying, if you paid a significant premium for the call, your position may still not be profitable.
• Short-dated calls with less time until expiration will experience significant time-decay, and lose value every day as expiration approaches. Long-dated calls still experience time-decay, but at a less rapid rate.
• Calls where the underlying is experiencing high volatility (big swings in price) will be priced much higher than calls with an underlying experiencing low volatility (steady price, sometimes called trading “sideways”).
  • Buying (long) a call option when the underlying has high volatility comes with increased risk of losing some or all of your premium paid. If volatility on the underlying asset decreases from when you bought the option, you may realize a large loss in the value of the call.
  • For example: Your option has an implied volatility of 140% when purchased, but after a few days has only 30% in implied volatility. Even if the underlying asset’s price has moved in your favour, the value of the option (your premium) may have decreased in value. 

Setting up the strategy

You buy a call option, this is often referred to as a Buy-to-Open or BTO order.

By buying the call option (or multiple contracts of the same call) you now have the right, but not the obligation, to buy 100 shares of the underlying stock or ETF at the strike price for every contract.

When choosing the strike price, consider the following:

• Strike prices that are In-the-money (ITM) or close to being ITM are more expensive since the odds of them being profitable at expiration are higher.
• Strike prices that are Out-of-the-money (OTM) are cheaper since the underlying would have to rise very sharply in value before expiration for the call to be profitable.

Long Call example

You think that stock ABC will increase in value over the next few weeks, and shares of ABC are trading for $150 each. If you wanted to profit off the increase in share price and bought 100 shares, it would normally cost you $15,000.

Instead of buying the shares, you instead buy a call option for a premium of $180 on ABC with an expiration date 2 months away with a strike price of $160.

Possible results:

1. ABC increases to $180 in the next 4 weeks, and you exercise your call contract to purchase 100 shares of ABC for only $160 (strike price). Then, you immediately sell them back into the open market for a $20 profit per share (share price of $180 - strike price of $160).
   
   Your total profit before commissions in this scenario would be $1,820 ($2,000 profit - $180 premium paid). 
   
   In order to execute this strategy, you’d be required to have $16,000 available in cash to exercise your call to acquire the shares. 
   
   Rather than exercising the call, many traders will choose to sell the call back into the market. The call itself will be worth at least the intrinsic value (in this example, $20 x 100 per contract) plus any time value left until expiration.
2. ABC increases in value to $162, however there’s only a week until your call expires. You can theoretically exercise your call, then sell the shares for a small profit of $20 total (share price of $162 - strike price of $160 - premium paid of $1.80 = $0.20 * 100 (options multiplier).
   
   However if you exercised this call, you would have to risk $16,000 to buy the 100 shares before trying to sell them for $16,200 in the open market. When you exercise an option, you also effectively “forfeit” the $180 premium you paid, reducing your total profit to $20.
   
   In this scenario, rather than exercising, a trader can choose to sell the call back into the market. The call will be worth at least the intrinsic value of $2 per contract, plus any very minimal time value since there’s only a week until expiration.
3. ABC increases in value, but only to $155 in the next 8 weeks. The call option you purchased expires worthless. You are in a loss of $180 for the premium paid when you purchased the call.
4. ABC decreases in value to $130 in the next 8 weeks. The call option you purchased expires worthless.
   • If you had purchased 100 shares of the underlying speculatively instead of buying the call option, you would currently be facing a $2,000 unrealized loss.
   • With the call option, your total loss is only the premium paid ($180).

These scenarios highlight some of the potential outcomes from buying a Call option, including benefits, risks and a comparison to owning the underlying investment itself.

Profit and loss explained

Maximum profit at expiration

Profit = [(Share price of underlying - Strike price) * 100 per contract] - Premium paid

Maximum profit = unlimited

Maximum loss

Total premium

Break-even at expiration

Break-even point = strike price of call + premium paid

Please note: You should consider the commissions paid as costs for these transactions in order to calculate your profit and losses.