What is a Long Call Option?
A long call is an options strategy that involves buying a call option on an underlying asset at a specific strike price for a specific amount of time or until the expiration date. The trader takes the role of the buyer and pays a premium for the call. The long call strategy aims to profit from the asset’s price increase. This is the opposite of the long put, which aims to profit from a decline in an underlying asset’s trading price.
Call options are versatile and can be used for different purposes, like:
- Speculation for expected bullish price movement,
- Leveraged exposure,
- Hedging, and/or,
- As part of a more expansive options trading strategy
How Does a Long Call Option Work?
Long calls are a bullish strategy, allowing traders to profit from upward price movements in the underlying asset. Traders buy call options when they expect the underlying security to increase beyond a certain point by expiration. If it does not, the option will expire worthless, and the trader will lose the premium paid; this is the maximum loss on the trade. The strategy can be suitable for beginners as it’s fairly straightforward. However, new traders must understand they can lose their entire investment when buying call options.
How Do You Trade a Long Call?
The mechanics of trading a long call will depend on your brokerage. However, the terminology is the same. You’ll open your brokerage portal to the options area, search for an underlying asset, pick calls, an expiration date, and a strike price. Once you have found the option you want to buy, you’ll issue a “buy to open” order.
| Trade Leg | Action | Asset | Moneyness |
|---|---|---|---|
| 1 | Buy | Call Option | Depending on Goal and Risk Tolerance (Long calls can be bought in-the-money, at-the-money, and out-of-the-money) |
Pro tip: Whenever buying or selling options, select “limit order,” not “market order.” As options premiums can be very volatile, setting a limit order ensures you get the price you want if it is available in the market.
Sample Long Call Trade
Let’s say you believe XYZ stock will increase in value over the near term. One way to trade this idea is to buy one (1) $100-strike call on XYZ Company for $3.00 per share or $300 total per call, with 30 days to expiration (DTE). Remember, one call equals one hundred shares of the underlying security.
Trade Detail Breakdown
- Underlying Asset: XYZ
- Strike Price: $100
- Premium Paid: $3.00 per share or $300 per contract.
- DTE: 30 days
XYZ Profit/Loss Profile
Long calls have defined losses, limited to the premium paid to set up the trade plus commissions. Meanwhile, they have unlimited profit potential because stock or asset prices can rise indefinitely.
- Maximum Profit: Potentially Unlimited
- Breakeven Point: Strike Price + Premium Paid
- Maximum Loss: Premium Paid
What Happens To Long Calls at Expiration?
The outcome of a long call option at expiration depends on whether it is in the money or out of the money. Here's how each scenario plays out:
- Out of the Money: If the call option expires out of the money, meaning the stock price is below the call option strike price, and the option expires worthless. The call option will disappear from your trading account.
- In the Money: If the call option is in the money, meaning the stock price is higher than the call option strike price, you have two options: you can exercise it or sell it. Exercising a call option means buying the underlying shares at the strike price and potentially selling them at the current market price for a profit. Remember, as the buyer, exercising the option is entirely your decision. Alternatively, you can sell the call option for a similar profit at expiration.
XYZ Long Call Option Profit/Loss Calculations
The maximum loss on a long call is the premium paid. That said, since there's no limit to how high a stock could go, the long call provides to potentially unlimited profits. To calculate the ROI on a long call, divide the profit by the premium paid and then subtract one. For example, if you paid $3 for XYZ and earned a profit of $7, the ROI would be 133%.
This table indicates the profit and loss amounts for XYZ stock at different price points. For example, if XYZ stock trades at $125 at expiration, the holder would have a $22 profit or $2,200 per contract. Go ahead and click the headings below to see how the values change.
| Price at Expiration | Value of Long Call | Profit/Loss |
|---|---|---|
| $130 | $30 | $27.0 |
| $125 | $25 | $22.0 |
| $120 | $20 | $17.0 |
| $115 | $15 | $12.0 |
| $110 | $10 | $7.0 |
| $105 | $5 | $2.0 |
| $100 | $0 | -$3.0 |
| $95 | $0 | -$3.0 |
| $90 | $0 | -$3.0 |
| $85 | $0 | -$3.0 |
Can I Sell My Long Call Before Expiration?
Yes, all long options can be sold anytime before expiration. If the trader sells the long call before expiration, they collect its intrinsic and any remaining extrinsic value. For example, if XYZ reaches $130 with 15 days remaining until expiration, the premium will likely be more than $30 for the $100-strike call due to the additional time value. The exact premium will depend on market volatility, interest rates, and days to expiration.
The Risks of Long Calls
The most significant risk to long calls is theta decay. Theta is an options Greek that indicates how much the option premium will lose in value each day until expiration. As a result, the premium on a long call will reduce daily (all things being equal), regardless of what happens to the underlying asset. Should the underlying asset not move above the strike price by expiration, the holder loses the premium paid, and the option expires worthless.
How Do I Choose the Right Strike and Expiration for a Long Call?
Choosing the right strike means balancing risk and reward. When it comes to long calls, a higher strike price means a lower premium, but at the expense of a lower chance of the option expiring in the money - and vice versa.
On the flip side, choosing an appropriate expiration date is also important. If the underlying stock doesn't move above the strike at expiration, the option will expire worthless. For that reason, traders will have a better chance of profit if they choose a longer expiration date.
What Happens On Expiration Day?
At expiration, the option will either be at the money, in the money or out of the money. If XYZ trades above $100, the call option is in the money. If it's a penny above the breakeven point, the trade will turn into a profit. The trader can either exercise their rights in the contract and buy 100 of XYZ at the $100 strike price, regardless of what XYZ is currently trading for. That said, selling the call right before expiration may be more advantageous as exercising a contract often costs more than the commission to sell the option.
How Does The Delta Of A Long Put Influence Its Risk/Reward Profile?
Long calls have positive delta values. Delta measures how much an option's premium changes in response to a $1 change in the underlying asset's price. For example, if the option has a +0.25 delta, the premium will likely increase by 25 cents for every $1 increase in the underlying price.
Delta is also used to estimate an option's probability of expiring in the money (ITM) or out of the money (OTM). The delta is directly proportional to the probability of expiring ITM for long calls. For example, if a long call has a +0.30 delta, the trade has a 30% chance of expiring ITM.