Long Call
In option trading there are two player, the seller and the buyer. If you buy a call, that means you are having long call position. Long call gives the owner the right to buy the underlying asset in the contract, but not an obligation.
For example, Alan and Tom agreed on a call options contract where Alan will buy from Tom, 100 shares (equivalent to one option) of Company XYZ at $20 which will expire on the third Friday of September. We call the $20 as strike price. Currently the price of stock XYZ is $25. He bought the option for $5. This is called the Option Premium.
At the expiry date or also called maturity date, the share price of Company XYZ remains at $25. Alan can exercise his right to buy the share for $20 and make $5 profit. If the share price goes down to $21, Alan can still profit $2 by simply exercising his rights.
However, if stock XYZ price goes down below $20 on the maturity date, for example drop to $15. The option will be too expensive for Alan so he can ignore the contract. If he wants to buy the stock, he can just buy it from the market. He don’t need to exercise the option. In this case, Alan will only lose the amount he paid for the contract which is $5. Tom, on the other hand will keep the stock and the premium, which is his profit.
A long call is a bullish strategy. Trader will enter the position if he thinks the price will go up. This is a basic strategy and the most common choise for option trader beginner.
With long call, your loss will be limited to the premium paid up front for the option, and your gain will be unlimited depends on how much the stock rallies.
By: Ian Sani.
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