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The Different Option Strategies
Long Call
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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