long term call options
Long term call options strategy
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Long A Call Option Definition And Example
What Does It Mean To Be Long A Call?
Definition of Being Long A Call:
An investor is said to be long a call option when he has purchased one or more call options on a stock or index. The term "going long" refers to buying a security (not selling one), and applies to being long a stock, long an option, long a bond, long an ETF and just owning an position. When you have a long position on any security, you want that security price to go up. This contrasts with the term "going short" which means that you have sold a security that you don't own and you expect that security price to decline.
When you are "long" you are hoping that the price of the underlying stock or index moves above the strike price of the option. When the stock price is above the strike price, the long a call position is "in the money." When the stock price is at the strike price, the option is said to be at the money." And when the stock price is below the strike price, the option is "out of the money."
Being long is opposite of being "short." The person that buys the call has a long position, but the person that sold or wrote it has a short position.
The person that is "long" wants the stock price to go up as much as possible so that his profit is maximized. The person that sold or wrote the call and is "short" and he wants the stock price to stay at or go below the strike price so that the option expires worthless.
Example of being Long a Call: Suppose YHOO is at $40 and you think YHOO's stock price is going to up to $50 in the next few weeks. One way to profit from this expectation is to buy the YHOO 45 Calls. Once you own the YHOO $45 calls, you are said to be "long the calls" on YHOO. The seller of the YHOO calls, from whom you purchased it, is said to be "short calls."
Trading Tip: It is best to be long a call option when you expect a rapid increase in the price of the underlying stock. The biggest price movements on a percentage basis generally come around the time that the company releases its earnings. Four times a year companies release their quarterly financial statements and you should always be aware of a company's earnings release dates. If you think a company is going to release very strong earnings, then go long a call option!
Here are the top 10 option concepts you should understand before making your first real trade:
A call option is an agreement that gives an investor the right, but not the obligation, to buy a stock, bond, commodity or other instrument at a specified price within a specific time period.
It may help you to remember that a call option gives you the right to call in, or buy, an asset. You profit on a call when the underlying asset increases in price.
Call options are typically used by investors for three primary purposes. These are tax management, income generation and speculation.
An options contract gives the holder the right to buy 100 shares of the underlying security at a specific price, known as the strike price, up until a specified date, known as the expiration date. For example, a single call option contract may give a holder the right to buy 100 shares of Apple stock at a price of $100 until Dec. 31, 2017. As the value of Apple stock goes up, the price of the options contract goes up, and vice versa. Options contract holders can hold the contract until the expiration date, at which point they can take delivery of the 100 shares of stock or sell the options contract at any point before the expiration date at the market price of the contract at the time.
[If you want to learn how to trade options and see if they are right for you, check out our Options for Beginners course on the Investopedia Academy.]
Options Used for Tax Management
Investors sometimes use options as a means of changing the allocation of their portfolios without actually buying or selling the underlying security. For example, an investor may own 100 shares of Apple stock and be sitting on a large unrealized capital gain. Not wanting to trigger a taxable event, shareholders may use options to reduce the exposure to the underlying security without actually selling it. The only cost to the shareholder for engaging in this strategy is the cost of the options contract itself.
Options Used for Income Generation
Some investors use call options to generate income through a covered call strategy. This strategy involves owning an underlying stock while at the same time selling a call option, or giving someone else the right to buy your stock. The investor collects the option premium and hopes the option expires worthless. This strategy generates additional income for the investor but can also limit profit potential if the underlying stock price rises sharply.
Options contracts give buyers the opportunity to obtain significant exposure to a stock for a relatively small price. Used in isolation, they can provide significant gains if a stock rises, but can also lead to 100% losses if the call option purchased expires worthless because the underlying stock price went down. Options contracts should be considered very risky if used for speculative purposes because of the high degree of leverage involved.
We’ve already warned you against starting off by purchasing out-of-the-money, short-term calls. Here’s a method of using calls that might work for the beginning option trader: buying long-term calls, or “LEAPS9rdquo;.
The goal here is to reap benefits similar to those you’d see if you owned the stock, while limiting the risks you’d face by having the stock in your portfolio. In effect, your LEAPS call acts as a “stock substitute.”
LEAPS are longer-term options. The term stands for “Long-term Equity AnticiPation Securities,” in case you’re the kind of person who wonders about that sort of thing. And no, that capital P in AnticiPation wasn’t a typo, in case you’re the kind of person who wonders about that sort of thing too.
Options with more than 9 months until expiration are considered LEAPS. They behave just like other options, so don’t let the term confuse you. It simply means that they have a long “shelf-life9rdquo;.
First, choose a stock. You should use exactly the same process you would use if purchasing the stock. Go to Ally Invest’s Quotes + Research menu, and analyze the stock’s fundamentals to make sure you like it.
Now, you need to pick your strike price. You want to buy a LEAPS call that is deep in-the-money. (When talking about a call, “in-the-money9rdquo; means the strike price is below the current stock price.) A general rule of thumb to use while running this strategy is to look for a delta of .80 or more at the strike price you choose.
Remember, a delta of .80 means that if the stock rises $1, then in theory, the price of your option will rise $0.80. If delta is .90, then if the stock rises $1, in theory your options will rise $0.90, and so forth. The delta at each strike price will be displayed on Ally Invest’s Option Chains.
As a starting point, consider a LEAPS call that is at least 20% of the stock price in-the-money. (For example, if the underlying stock costs $100, buy a call with a strike price of $80 or lower.) However, for particularly volatile stocks, you may need to go deeper in-the-money to get the delta you’re looking for.
The deeper in-the-money you go, the more expensive your option will be. That’s because it will have more intrinsic value. But the benefit is that it will also have a higher delta. And the higher your delta, the more your option will behave as a stock substitute.
You must keep in mind that even long-term options have an expiration date. If the stock shoots skyward the day after your option expires, it does you no good. Furthermore, as expiration approaches, options lose their value at an accelerating rate. So pick your time frame carefully.
As a general rule of thumb, consider buying a call that won’t expire for at least a year or more. That makes this strategy a fine one for the longer-term investor. After all, we are treating this strategy as an investment, not pure speculation.
Now that you’ve chosen your strike price and month of expiration, you need to decide how many LEAPS calls to buy. You should usually trade the same quantity of options as the number of shares you’re accustomed to trading.
If you’d typically buy 100 shares, buy one call. If you’d typically buy 200 shares, buy two calls, and so on. Don’t go too crazy, because if your call options finish out-of-the-money, you may lose your entire investment.
Now that you’ve purchased your LEAPS call(s), it’s time to play the waiting game. Just like when you’re trading stocks, you need to have a predefined price at which you’ll be satisfied with your option gains, and get out of your position. You also need a pre-defined stop-loss if the price of your option(s) go down sharply.
Trading psychology is a big part of being a successful option investor. Be consistent. Stick to your guns. Don’t panic. And don’t get too greedy.
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The long call option strategy is the most basic option trading strategy whereby the options trader buy call options with the belief that the price of the underlying security will rise significantly beyond the strike price before the option expiration date.
Compared to buying the underlying shares outright, the call option buyer is able to gain leverage since the lower priced calls appreciate in value faster percentagewise for every point rise in the price of the underlying stock
However, call options have a limited lifespan. If the underlying stock price does not move above the strike price before the option expiration date, the call option will expire worthless.
Since they can be no limit as to how high the stock price can be at expiration date, there is no limit to the maximum profit possible when implementing the long call option strategy.
The formula for calculating profit is given below:
- Maximum Profit = Unlimited
- Profit Achieved When Price of Underlying >= Strike Price of Long Call + Premium Paid
- Profit = Price of Underlying - Strike Price of Long Call - Premium Paid
Risk for the long call options strategy is limited to the price paid for the call option no matter how low the stock price is trading on expiration date.
The formula for calculating maximum loss is given below:
- Max Loss = Premium Paid + Commissions Paid
- Max Loss Occurs When Price of Underlying The Options Guide
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