The Long Call Strategy
Jim Graham

Most investors start by buying stock, and they are used to thinking in terms of purchasing a stock for its potential to go up in price. So new option traders usually start out simply buying call options because it seems similar to what they are used to doing. When a call option on stock is purchased (also called "going long the option"), the call holder is able to control the stock without actually possessing it, and does so for a fraction of the cost.

Buying calls has been one of the most popular strategies with investors since listed options were first introduced. Before moving onto more complicated strategies, an investor should thoroughly understand buying and holding call options.

A long call is a leveraged alternative to the stock itself. As the stock price increases, the option value increases by more (sometimes much more) on a percentage basis. This leverage can result in large percentage profits, because purchasing calls requires lower up-front capital than an outright purchase of the stock. In fact your profits are theoretically unlimited, since there is no limit on how high a stock price can go.

This strategy also has limited risk, since you cannot lose more than you paid for the option. However, while the potential loss is limited in terms of dollars, you can lose 100% of the premium paid for the call. The performance graph below shows the (limited) risk and unlimited potential profit for the long call strategy.

Performance Graph Example

The three lines in the figure above graphically illustrate how time decay affects this position. The dotted line represents the long call's theoretical performance as of today, the solid line represents the performance at expiration (the final day of trading), and the dashed line represents the performance of this option halfway between today and expiration. Notice also that the intersection of each line with the $0 profit line represents that time frame's break-even point; and this break-even point moves farther to the right as time passes.

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