A long call is an options trading strategy where an investor purchases a call option with the expectation that the price of the underlying asset will rise significantly. A call option gives the holder the right, but not the obligation, to buy a specific quantity of the underlying asset at a predetermined price (known as the strike price) within a specified period (until the option’s expiration date).
Key components of a long call strategy-
- Call Option: The trader buys a call option, paying a premium (the cost of the option), which gives them the right to buy the underlying asset.
- Strike Price: The strike price is the price at which the trader has the right to buy the underlying asset. This is specified in the call option contract.
- Expiration Date: Call options have a finite lifespan, and the trader must exercise the option (buy the underlying asset) before or on the expiration date.
- Bullish Expectation: A long-call strategy is typically used when the trader is bullish on the underlying asset, anticipating that its price will rise.
Here’s how a long call strategy can work:
- Suppose an investor believes that the price of the Company’s stock, currently trading at Rs.500, will increase in the near future.
- They decide to buy a long call option with a strike price of RS.5500 that expires in three months. They pay a premium for this option.
- If the stock price of the Company rises above Rs. 550 before the option’s expiration date, the investor can exercise the option and buy the stock at the lower strike price, which is Rs.550. They can then sell the stock at the market price, potentially making a profit.
- If the stock price doesn’t rise above Rs. 550 by the expiration date, the investor is not obligated to buy the stock, but they will lose the premium they paid for the call option.
In summary, a long-call strategy allows investors to profit from upward price movements in the underlying asset while limiting their potential losses to the premium paid for the option. It’s a strategy used by traders who are bullish on a particular asset and want to leverage their upside potential without directly owning the asset itself.
