What is a long call?

A long call strategy involves buying a call option, giving the holder the right (but not the obligation) to purchase the underlying asset at a specified price (strike price) within a specified period (until expiration).

The objective is to profit from a significant rise in the price of the underlying asset while limiting risk to the premium paid for the option.

Risk/Reward: 

- Risk: Limited to the premium paid for the call option. The maximum loss occurs if the option expires worthless.

- Reward: The potential profit is theoretically unlimited since the underlying asset's price can increase indefinitely. The breakeven point is the strike price plus the premium paid.

Example:

XYZ stock is trading at $10 and you think the stock price will increase over the next 2 months. You buy the XYZ $11 call option expiring in 60 days for $1.50:

The theoretical max gain is unlimited because there’s no limit to how high the XYZ’s stock price can rise.

The theoretical max loss is $1.50 per share, or $150 total for each contract bought. Max loss occurs if XYZ closes at or below $11 on expiration, and the option expires worthless.

The breakeven point at expiration is $12.50. It’s calculated by taking the strike price $11 and the premium paid ($1.50).

How should I manage a long call position?

Although you have the right to exercise your option, it isn't the typical way to close a long call. Instead, you could consider selling your call before expiration to avoid the exercise process, and any additional risk that it may introduce. 

There are different strategies to close a long call. You can sell the call option before expiration, roll it to a new expiration date or strike price, or hold it through expiration. The choice depends on the asset's performance and your expectations.

What can happen if I hold a long call at expiration?

When holding your contract until expiry the following three scenarios can happen.

  1. It can either expire worthless out of the money and you lose the premium you paid for it.
  2. It can get auto exercised at expiry if you have the buying power to buy the underlying shares of the options contracts
  3. It can auto-liquidate. If you don't have the buying power to exercise the contract, our broker will attempt to sell your option contract for its intrinsic value prior to its expiry.

What should I do if my long call is expiring soon?

As expiration approaches, usually around 30-45 days out, the rate of time decay accelerates. The closer the option gets to expiration, the more its extrinsic value diminishes each day. Ultimately, at expiration, a call option is valued solely based on its intrinsic worth (the difference between the stock price and the strike price).

If your long call is profitable, consider selling it before expiration to lock in gains and avoid losing extrinsic value. If the option is out-of-the-money, you can choose to sell it to limit losses or let it expire worthless.

What is the difference between buying a long call or buying the stock?

Although owning stock and buying a call are both strategies that are counting on the price of the underlying asset to go up, they have many differences:

  • Stock represents ownership in a company, whereas a call option is a contract that represents the right to buy shares of the underlying stock or ETF. As a shareholder, you may have voting rights and be entitled to any dividends paid by the company. As the owner of a call option, you have no shareholder rights (unless you exercise and convert your call into shares).
  • Options have an expiration date. This means there will be a day in the future when you can no longer trade or exercise your option. When you own stock, you can keep your shares for as long as the stock exists.
  • A call’s price may not move dollar-for-dollar with the underlying stock. Even if the underlying stock price goes up, the option’s price may only go up fractionally, or possibly decrease, depending on certain factors.
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