BAJAJ BROKING
February 20, 2025
5 mins read
There are numerous options trading strategies in the market for traders to use for their benefit. The long call strategy happens to be one of the simplest options trading strategies that is available to traders. The long call strategy gives the buyer, who is also known as the option holder, the right to buy a security at a predetermined price in the future, without the obligation to do so. This makes options a very flexible investment but this flexibility comes at a cost known as the premium. This premium is paid by the option holder to the option seller.
If in case the market doesn’t move in the option holder’s favour, the option holder can let the option expire, i.e. hold on to it till the predetermined date. The maximum loss that they incur in this case is just the premium they paid to the option seller. However, if the market moves in the buyer or holder’s favour, the buyer can exercise the option and potentially make a profit.
Let us take a deeper dive into what the long call strategy is all about to help you understand how it works and how it can be utilised.
In an option strategy like a long call, traders are essentially expecting that a stock’s price will rise before their option expires. When traders buy a long call option, it is with the hope that they will be able to exercise the right to buy the stock when its price is lower and sell it for a profit.
To carry out this type of strategy, all traders need to do is buy a call option of a particular stock. The trader selling the call option, in such cases, takes a short call position. With a rise in the stock price, the value of the call option also increases thus helping traders make a profit.
Of the many bullish strategies in the market, the long call is an extremely popular one. When used in the right manner, traders can produce significant returns while keeping their risk limited to the premium paid for the option.
Long Call - Example
Here’s a look at an example of a long call to help you understand the strategy better. Suppose a trader purchases a call option for stock A that has a strike price of ₹200 and an expiration date that is a month away. This essentially means that the trader can buy 100 stock A shares at ₹200 before the option expires.
If the stock price increases to ₹210 within the particular month, the trader can buy the shares at ₹200 with the help of the call option and sell it immediately for ₹210. This helps them make an extra ₹10.
Calculation of Breakeven Price on Long Options
Formula
Here is a look at the formula:
Breakeven point = premium paid strike price of long call
At the Money or ATM is a term that is used in options trading when both the option strike price and the current price of the underlying stock are the same. In such a case, the intrinsic value of the option ceases to exist but its extrinsic value or time is still intact, at least till it expires. ATM option has a delta of ±0.50, meaning which indicates that if the option is a call option, its delta is +0.50 and if it's a put option, its delta is -0.50
Both Call and Put Options in ATM
An option can be at the money whether it’s a call option or a put option.
Here’s an example to help you understand this: Suppose a stock is currently trading at ₹100. The strike price of both the call option and the put option is ₹100. As the strike prices are the same as the stock's market price, both options are considered at the money (ATM).
At-the-Money Options—Working
Based on how the strike price relates to the stock’s current price, options can be classified into three types:
In the Money (ITM): This type of option has intrinsic value
Out of the Money (OTM): This type of option has no intrinsic value
At the Money (ATM): The option has no intrinsic value yet, but it has extrinsic value.
At-the-Money Options' Value
As already determined, ATM options don’t have intrinsic value. However, it is important to remember that they still have extrinsic value which is also called time value. The main reason for this is that the chances of the option moving into In The Money (ITM) before expiration still exist. This, as a result, makes them valuable to traders looking for short-term price movements.
The term Near the Money (NTM) is often used when an option is just 50 paise away from being At the Money (ATM). In other words, it’s almost there, but not quite.
Call options are an exciting and powerful tool in modern finance. They give you the chance to earn higher returns than your initial investment and allow you to build strategic, high-potential positions in the market.
As a call option buyer, you get to capture all the upside potential of a stock—without having to pay the full share price. That means you can leverage big moves in the market while risking only a fraction of what it would cost to buy the stock outright.
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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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The bullish long call strategy is an option strategy where traders expect that a stock’s price will rise before their option expires. When traders buy a long call option, it is with the hope that they will be able to exercise the right to buy the stock when its price is lower and sell it for a profit.
In a bullish long call strategy, if the market doesn’t move in the option holder’s favour, the option holder can let the option expire, i.e. hold on to it till the predetermined date. The maximum loss that they incur in this case is just the premium they paid to the option seller. However, if the market moves in the buyer or holder’s favour, the buyer can exercise the option and potentially make a profit.
Some of the benefits of the strategy include:
Loss is limited only to the premium paid
Strategy is customisable based on the risk aptitude of the trader
This strategy can best be used when traders expect that the price of a security will climb in a significantly short time.
Two main risks are associated with the bullish long-call strategy:
Time decay
Market volatility
A Bullish Long Call involves buying a call option to profit from rising prices, unlike spreads or covered strategies that limit risk/reward. It has unlimited upside but loses premium if the price drops.
This strategy is best used in a bullish market.
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