A long call gives you the right to buy the underlying stock at strike price A.
Calls may be used as an alternative to buying stock outright. You can profit if the stock rises, without taking on all of the downside risk that would result from owning the stock. It is also possible to gain leverage over a greater number of shares than you could afford to buy outright because calls are always less expensive than the stock itself.
But be careful, especially with short-term out-of-the-money calls. If you buy too many option contracts, you are actually increasing your risk. Options may expire worthless and you can lose your entire investment, whereas if you own the stock it will usually still be worth something. (Except for certain banking stocks that shall remain nameless.)
Who Should Run It
Veterans and higher
NOTE: Many rookies begin trading options by purchasing out-of-the-money short-term calls. That’s because they tend to be cheap, and you can buy a lot of them. However, they’re probably not the best way to get your feet wet. The Rookie’s Corner suggests other plays more suited to beginning options traders.
When to Run It
You’re bullish as a matador.
Break-even at Expiration
Strike A plus the cost of the call.
The Sweet Spot
The stock goes through the roof.
Maximum Potential Profit
There’s a theoretically unlimited profit potential, if the stock goes to infinity. (Please note: We’ve never seen a stock go to infinity. Sorry.)
Maximum Potential Loss
Risk is limited to the premium paid for the call option.
TradeKing Margin Requirement
After the trade is paid for, no additional margin is required.
As Time Goes By
For this strategy, time decay is the enemy. It will negatively affect the value of the option you bought.
After the strategy is established, you want implied volatility to increase. It will increase the value of the option you bought, and also reflects an increased possibility of a price swing without regard for direction (but you’ll hope the direction is up).
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