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You Are Here: Home > Stockmarket & Trading > Options > Option Strategies > Long Call
The Different Option Strategies
Long Call
Summary:
For aggressive traders who are bullish, buying calls can be an excellent way to capture the upside potential with limited downside risk
Long Call
Risk: Limited
Reward: Unlimited
The Trade: Buy and out of the money call option

ABC Stock trading at £5.00

Buy 1 Sep £5.50 call (see pay-off diagram below)

Long Call Option

When to use: Very bullish on a stock's price. The more bullish the higher the strike should be. No other position gives you as much leveraged advantage with limited downside risk.
Volatility expectation: Volatility bullish. Volatility increases greatly help the position, volatility decreases can be a disaster if the option was bought when volatility was high.
Profit: Unlimited in a rising market.
Loss: Limited to the initial premium, maximum loss if market expires at or below the option strike.
Breakeven: Reached when the underlying rises above the strike price, by the same amount as the premium paid to establish the position.
Time decay: This position is a wasting asset. As time passes, value of position erodes toward expiration value. If volatility increases, erosion slows, if volatility decreases, erosion speeds up.

Trading ideas and tactics:

  • Be very cautious about buying options (puts or calls) in high volatility environments. Often you will be right on your direction but lose or make a tiny profit because of contracting volatility

  • If you do buy calls when volatility is high then try and take profits/losses quickly before a reduction in volatility starts to take effect on premiums. Almost like a smash & grab raid, in quickly and out quickly (say within a week)

  • Your timing must be excellent when buying calls. You almost want to see the market move in your favour that day

  • Don't look to buy options with less than 30 days left to expiry - Time erosion is at its highest. Better to buy options with 30 - 60 days till expiry. Yes, they're more expensive but better chance of making a profit

  • Instead of buying one option and if wrong, letting it expire worthless, consider buying two options with the same monetary risk. If the two options reduce in value by 50% then dump the position

  • Try and sell a portion of your position if the option doubles, then consider selling the other part of the position if the option trades back to the original purchase price

  • Always assume that your timing will be off when buying calls and take this into account
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