The long call options strategy is perhaps the most common and basic bullish options strategy. It is extremely effective in trending market environments when the market continually goes up and up and up without turning back down. Pros 1 Leverage 2 Potential For Assymetric Returns 3 Limited Downside 1 Leverage Call options provide you leverage that lets you achieve larger percentage changes on your capital than holding stock itself. If you are wrong , you can only lose as much as you put in, but your potential gains can be multiples.
The probability of that happening is not very high , so you want to be selective of when you enter a long call options trade. If you are not super confident in timing, then you may be interested in buying longer-dated options that are also in-the-money rather than out-of-the-money. More on this below. With a long call, you can only lose as much as you put in. So your downside is technically limited. When you own options, you want them to show movement in your favor fairly quickly soon after placing the trade.
If you do not expect the market to move between now and your time of expiration, then you may want to sell options, rather than buy them. That way the time decay will work in your favor. However, if you sell and the market does move against you, then you could lose more than you collected.
The long call strategy is only worth it if you expect a trending move to the upside — because you only make money after it moves past your break even point. The power of long call options lies largely in the power of options leverage: Most people are familiar with the options payoff diagram for long calls — as shown to the right.
As the stock price goes up — you move towards the right on the payoff diagram. And since the diagram draws up and to the right, the higher the stock price is, the greater the profit becomes. Not moving over an extended period of time is not a good thing! If you have a 1 month call option, the decay of that premium accelerates in the last two weeks of the option — and is particularly pronounced in the last few days prior to expiration.
So the different strike prices can offer you various price points. Typically, out-of-the-money call options have a stronger time decay that works against you than an in-the-money call option. Remember, in-the-money call options already have intrinsic value.
However, if the stock does not move and just stays put, then your out-of-the-money call option will also lose more value than an in-the-money call option. So again, in-the-money call simply means that the stock price is trading higher than your strike price. These call options have lower strike-prices compared to the stock price. Since they have intrinsic value, they are typically more expensive and less risky call options.
Out-of-the-money calls are riskier calls with a stock price that is lower than the strike price. In the event, the stock price never makes it above the strike price by expiration, then you could lose your entire options bet.
If you are correct in timing , out-of-the-money calls would be the most rewarding from a percentage change basis, but you risk losing it all. This video talks about the power of timing.
If you can time it right, then cheap, out-of-the-money call options are like lottos. But for a less risky approach, choose the more expensive, in-the-money or at-the-money strike price when selecting call options. All options have an associated expiration date, often referred to as duration of that call option. Typically, for each underlying stock or index, there are monthly option expirations — usually the 3rd Friday of each month.
For the SPX, they even offer Monday expirations. Certainly, as these financial products become more and more popular, the availability of daily expirations may be possible one day. These options expire on each Friday — unless there is some kind of Holiday — in which case, the expiration could be that Thursday instead, depending on that week. You can find a list of all available options on any option chain provided within any options brokerage. Notice at the top row, we see July 22, July 29 — just 7 days apart, indicating these are weekly options that are available in the immediate term.
Monthly calls are available on the 3rd Friday of each month. So in the example above, the August 19, — represents the 3rd Friday expiration for the month of August. The Wednesday option is a new development that began in August We entered this position about 2 months earlier towards the end of October — shortly before the Nov Presidential election, when Trump ended up winning.
At that time, IWM was trading in the range. Essentially, this was a bet during October for a year-end rally with an expiration on December 30 — close to the last day of While the Russsell went against us for several days going into November — the value of the calls went down. But the amount that it went down is small when compared to a bullish put spread option strategy. This was highlighted in one of the risks of the put spread strategy. Since we selected December calls, the drop in our account value was not as bad as if this were a shorter-term-dated option.
Indeed, the first week or so of the trade worked against us, but the losses were manageable that we were able to hold on. Weekly options entered that week of the rally would have done better than the monthly options we chose.
Alternatively as well, we could have chosen a shorter-dated option — say November 30 calls instsead of December 30 calls — that would have also contributed to a larger percentage increase in the option value. So while you can choose strike prices and date of expiration for your call option, what matters most is that there actually is a trending move. With trending moves , call options provide the best return on capital.
If you are able to select strike prices and time things, then you can further enhance your return. In conclusion, the long call options strategy is a good strategy when you expect an immediate and trending bullish move. Options are generally priced with a Black-Scholes formula that assumes normal distributions with statistical terms such as standard deviations.
But in a trending market environment, these options become mispriced and they change in value in a large percentage way that makes the long call strategy very appealing in this market environment. The trickiest part is knowing that the trend will actually continue and not reverse. He received a B. This trading education blog is partly a result of the inspiration from that speech. Here at , Mr. SilverSurfer serves as Head Trader sharing not only his market views and trades publicly, but also his passion and vision to educate everyday people with real-life practical skills in how to make a little extra money in the global financial markets.
Call options provide you leverage that lets you achieve larger percentage changes on your capital than holding stock itself. As with any kind of leverage, what works really well when you are correct can also work really bad against you. Requires an upfront cost and is not effective if the market moves up just a little bit how much is largely determined by the level of implied volatility. Long Calls are only effective in trending, large moves up larger than what implied volatility is implying a potential move to be.
If you expect the market to just move up a little bit over a period of time, the bull put spread strategy may be more effective. When you expect a move like this, use the long call strategy.
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