Long Call Option Trading Strategy Explained

Published on Tuesday, April 17, 2018 | Modified on Wednesday, June 5, 2019

Long Call Options Strategy

Strategy Level	Beginners
Instruments Traded	Call
Number of Positions	1
Market View	Bullish
Risk Profile	Limited
Reward Profile	Unlimited
Breakeven Point	Strike Price + Premium

A Long Call Option trading strategy is one of the basic strategies. In this strategy, a trader is Bullish in his market view and expects the market to rise in near future. The strategy involves taking a single position of buying a Call Option (either ITM, ATM or OTM). This strategy has limited risk (max loss is premium paid) and unlimited profit potential.

When the trader goes long on call, the trader buys a Call Option and later sells it to earn profits if the price of the underlying asset goes up.

When the trader buys a call, he pays the option premium in exchange for the right (but not the obligation) to buy share or index at a fixed price by a certain expiry date. This premium is the only amount at-the-risk for trader in case the market moves in other direction (price of underlying asset falls).

In this strategy, we first buy a call and then close out the position later. This strategy should not be confused with 'Naked Call' where we sell calls and then buy them back at a cheaper price.

When to use Long Call strategy?

A long call Option strategy works well when you expect the underlying instrument to move positively in the recent future.

If you expect XYZ company to do well in near future then you can buy Call Options of the company. You will earn the profit if the price of the company shares closes above the Strike Price on the expiry date. However, if underlying shares don't do well and move downwards on expiry date you will incur losses (i.e. lose premium paid).

Example

Example 1 - Bank Nifty

Example 2 - NIFTY OPTIONS

Suppose you are bullish on Nifty today when the Nifty is trading at 10, 550. You can implement a long call strategy by buying a call option with a strike price of 10,750 at a premium of Rs 40. If the Nifty goes above 10,790, you will make a net profit on exercising the option. In case the Nifty stays at or falls below 10,750, you will make a maximum loss of the premium paid.

Note: Break Even Point is 10,790. The maximum loss cannot be greater than Rs 40 premium paid.

Market View - Bullish

When you're expecting a rise in the price of the underlying and increase in volatility.

Actions

• Buy Call Option

A long call strategy involves buying a call option only. So if you expect Reliance to do well in near future then you can buy Call Options of Reliance. You will earn a profit if the price of Reliance shares closes above the Strike price on the expiry date. However, if Reliance shares don't move up within the expiry date you will incur losses.

Breakeven Point

Strike Price + Premium

The break-even point for Long Call strategy is the sum of the strike price and premium paid. Traders earn profits if the price of the underlying asset moves above the break-even point. Traders loose premium if the price of the underlying asset falls below the break-even point.

How to exit?

• Sell the Call on profit before expiry
• Wait for the Call to expire
• Exercise the Call to buy the underlying

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