A call option allows an investor to pay a fixed premium for the right, but not the obligation, to buy an asset at a predetermined price until expiration. The Long Call strategy might be useful for an investor who is bullish on either the market or the price of a specific stock. Investors going long calls may profit if the price of the underlying shares rises above the combined value of the strike price and the net cost of the option. The payoff from a long call position is unlimited, increasing point for point with the stock if the price of the underlying shares move higher. The loss potential is limited to the initial cost of the option. Investors face a maximum loss of the premium at any point at or below the strike price, above which point losses diminish. The value of a long call option is hurt by the passage of time and benefits from increases in volatility.
Long Call Example:
- Underlying XYZ stock price: $46.25
- Call strike price:50
- Call option premium: $1.50
- Days to expiration: 90
- Breakeven: 50+$1.50=$51.50 (Strike price plus premium paid for call option)
- Profit potential: Unlimited
- Potential profit:@$55.00 – The call option is worth $3.50 to a buyer who paid $1.50, since profit = underlying price at expiration minus strike price less the premium paid, or $55.00 – 50.00 -$1.50 = $3.50.
Maximum loss: Defined by the premium paid of $1.50. Occurs at the strike price and all points below.
Market Outlook – Bullish
Volatility View – Premium increases
Time Erosion – Premium decays
Dividends – Premium decreases
Interest Rate – Premium increases
Profit Potential – Unlimited
Loss Potential – Limited
Components – Buy call option
|Underlying Stock||$ 46.25||Underlying Stock||Profit & Loss|
|Long Call Strike||$ 50.00||$ 10||$ (150.00)|
|Premium||$ 1.50||$ 20||$ (150.00)|
|$ 25||$ (150.00)|
|$ 30||$ (150.00)|
|$ 35||$ (150.00)|
|$ 40||$ (150.00)|
|$ 45||$ (150.00)|
|$ 50||$ (150.00)|
|$ 55||$ 350.00|
|$ 60||$ 850.00|
|$ 70||$ 1,850.00|
|$ 80||$ 2,850.00|
Traders’ Insight – Option Related Articles
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