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Long Call Option Strategy

Long Call Option Strategy

What is Long Call Option Strategy?

  • Long Call option' is the most basic & simplest strategy. It is recommended or implemented when we expect the underlying asset to show significant upside move i.e., this is a directional strategy where we are bullish on the market direction. Buying a Call or Long Call is the same as future but capped with downside risk and requires less margin for implementation.

When To Execute?

  • When we are bullish on market direction and expect prices to move significant upside.

What is the Trade?

  • Generally, under Long Call, buying an ATM call option will suffice the purpose, we can also buy ITM and OTM call option, risk reward will be different in all the cases. Break Even of Long Call = Strike Price + Premium.

What will be maximum profit?

  • Undefined if market moves above Breakeven point (i.e., Strike Price + Premium).

What will be your maximum loss?

  • Since it’s a net debit trade you pay for buying the call option upfront i.e., Premium. Your maximum risk is capped. It can be calculated by (Net Premium Paid* Lot Size). If the market closes between Strike price and Breakeven, the buyer of Call will recover premium by the amount of Spot – Strike.

What are the advantages?

  • Unlimited profit potential with capped risk. Possibility of greater leverage than owning the stock. Required less margin as compared to Futures

What are the disadvantages?

  • 100% potential loss of premium in case of inappropriate strike, choice of stock, time decay. Greater leverage could prove detrimental in case the expected outlook fails.

Example for Long Call:

  • Nifty future price is 15500. A Long Call can be devised by Buying one lot of 15500 CE (ATM) @ 165. Net Premium Paid or Received = Rs. (-165). Undefined profit will if market closes above at 15500 + 165 = 15665, Max Loss if underlying stays below the strike i.e., 15500.