What is Long Call Option Strategy
Overview of Long Call Option Strategy
A long call gives you the right to buy the underlying stock at a strike price.
The long call option strategy is basically a bullish options trading strategy using which you hope to make money with price of the underlying stock rising significantly more than the strike price before the option expiry date.
By definition, Long Call Option Strategy offers unlimited profit and limited loss.
If you buy a long call option and the price of underlying stock goes up – you make money. However, instead if the stock price goes down or does not go up as much as you expected, you’ll lose money.
The term unlimited profit is theoretical because it refers to a situation wherein a stock just keeps going up. Since stocks do not have a maximum price ceiling they can reach, so it refers to an unlimited price and unlimited profit situation. In reality, stocks never reach a unlimited price point. Their price goes up and then it comes down, which means you’ll have limited profit but that limit is just not a certain limited amount. You’ll however have limited loss because in worst case scenario, you’ll lose all the money you invested in this long call. Your investment can go to zero but not below that.
Example of Long Call Option Strategy
For example, you may like Apple as a company and the products they sell. This makes you believe/hope that the stock price of Apple will be higher than today in the future.
Lets have a look at the below option chart for Apple for a particular day. It is a $165 strike call option for April 18, 2019 expiry.
Price (premium) for this call option ranged from 10.50 to 13.98 during the day. It opened at 13.98 and closed at 11.16, so obviously, it was not a good day for AAPL since it dropped 19.42%. Note that the price of AAPL stock did not drop by 19.42%. AAPL stock price in fact dropped by 3.12% but the corresponding drop for this particular option was 19.42%.
If you bought this option during the day, you’d have bought it at a price within this price range. Lets assume you bought a long call option when the price of this option was 12.
i.e. your trade was: AAPL Apr 18 2019 165.00 Call Buy to Open 1 @ 12.00
To buy this option, you’ll have to pay $1200 (1 x 100 x 12). This would be your worst case scenario loss i.e. you’ll lose all your investment i.e. your options become worthless.
For you to make money off this trade, you’ll need the AAPL stock price to be higher than the strike price plus the premium you paid towards it i.e. 165+12 = $177.
You can sell this call option any day before April 18, 2019 and book your profit or loss. Say if the premium reaches say 14, you’ll make $2 (14 – 12 = 2) per option i.e. $200 profit. Whatever amount higher than 12 it goes to, it would be your profit.
Look at this below long call option trade I did in 2018. I bought and then sold PANW long call option for a nice profit of $177.95 in less than a week.
I bought PANW 230 call at a price of 4.3 and sold it at 6.1. I could have held it and maybe it would have reached 10, maybe 20, maybe 30.. and so on, which means I had an unlimited upside (theoretically). Worst case scenario, I would have lost all my investment i.e. $431.02 on this trade.
Look at this below long call option trades I did in 2018 in TWTR.
TWTR had mixed results and the stock got hit hard. I saw an opportunity to get in and bought my first long call but unfortunately Facebook scandal broke and it took down other social media companies too. I acted foolish thinking that I have enough time for the stock to recover and kept buying the same one over and over again.
As we know, TWTR did not recover for rest of 2018 and booked my loss (total loss of $1413.10) to reduce my tax exposure for 2018.
When to Close a Long Call Option?
Obviously your aim with long call options is to close them before they expire and make some money. So, it does not hurt to book profits whenever you can irrespective of when the expiration date is. If your expiration date is 4 months from now but you already doubled your investment, I’d say sell it now!
If you’re losing money on a long call option, it is also a good idea to book losses and close the call because as expiration date nears – those options will become zero. If your options have already become worthless, there is no point in trying to sell them and save a few bucks on commission fees (actually they may not even sell because there isn’t any volume.
Role of Time Decay
As date nears the expiration date of the option, the premium price will get realistic and aligned with the actual price. As expiration nears, out-of-the-money and at-the-money calls will lose their value faster than in-the-money calls due to theta decay or time decay.
All the above options are worthless because of time decay.
Take a look below at some more worthless long call options in my current portfolio. Their price has become zero (0.01) and even if I try to sell them to book a loss, they’re not getting sold and hence, I have no option but to wait for the expiry date so that they expire worthless and get removed from my account.
Important Tips for Long Call Options
Best thing about buying long call options that it is the simplest options strategy to get started with, especially for those new to options trading. However, at the same time, it is a risky strategy as well.
Long call options offer unlimited upside potential, however, practically speaking – there is nothing like unlimited upside. At best you may have a nice upside profit or in worst case scenario, you’ll lose your investment.
Hence, when buying call options, always remember to:
- Avoid those options, which are way out of money.
- Size your position appropriately. Don’t invest too much in one option and in one company.
- Don’t allocate too much capital in one particular strategy.
Have a look at below reckless long call option trades I did in the last quarter of 2018. As markets started correcting, I kept on buying more and more long calls, hoping the markets will recover but it never did and I lost of lot of money doing the same.
Lesson learned, do not invest too much money in long call options. They are simple to get started with but are more like a punt instead of a strategy.