Long call options give an investor a chance to bet on whether the underlying stock will rise or stay above a strike price. This allows them to profit without having all the risk associated with owning the stock outright. Because calls are less expensive than the stock itself, a trader can leverage more shares than they could with just the stock.
However, be careful when buying out-of-the-money short-term calls. They may be attractive to new traders as they are cheap to buy, but often end up being a losing endeavor. Remember, call option life spans are fairly limited and there is the risk that the stock will not rise above the strike price in time to make any profits and the option could end up being worthless.
Maximum Loss = Net Premium Paid
The maximum gain for a long call strategy is unlimited as the stock can continue to move up gaining more and more value.
The breakeven on a long call option is calculated by adding the premium from the strike price.
If a stock is trading $100 and an investor wants to buy a 110-strike price call for $2.0, then the breakeven would be $112.00.
If stock XYZ is trading at $100 per share, an investor can buy a 100 strike price call option for only $10. Because one contract controls 100 shares, then the price the investor will pay for this option is $1000. ($10 X 100 = $1000)
The gamble is that they underlying stock will climb past the $100 mark by at least $10 if the investor wants to see any profit from this transaction. For every dollar the stock rises above the strike price (after the first $10) the investor will see $100 in profit from this option, and that can be a real moneymaker if the stock continues to trade higher.
Conversely, if the stock stays at $100 a share, shown by point A on the graph, or goes lower than the strike price, then the option will expire worthless resulting in a a $10 loss for the investor, which is 100% of their investment.
The long call is an investment practice that allows the investor to wager on the increase of the stock. The investor must be able to handle the potential loss of the entire premium if they are wrong. A trader can earn much more through call ownership compared to owning the stock, but the risk of losing is also much higher. To learn more about long call option strategy click here.