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Bull Market – Long Call

Lesson 2 of 11
Duration 1:25
Level Intermediate
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An investor might use a long call option position when the share price or market is expected to rise.

Study Notes:

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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The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.

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