Long Call

A long call means buying a call option. It is the simplest bullish options strategy: you pay a premium for the right to buy the underlying at the strike price before expiration. If the underlying rises well above the strike, the call gains value and can return many times its cost. If it does not, the most you can lose is the premium you paid. That combination of limited risk and large potential upside makes long calls popular, but time decay and volatility make them harder to profit from than they look.

Payoff at a glance#

Worked example#

Why traders buy calls#

• Leverage: gain exposure to a rise for a fraction of the stock's cost.
• Defined risk: the premium is the most you can lose.
• Event exposure: take a view before a catalyst without risking more than the premium. See Earnings Trading.
• Stock replacement: deep in the money calls can mimic owning shares with less capital. See Moneyness: ITM, ATM and OTM.

The three ways a long call loses#

1. Wrong direction: the stock falls or stays flat.
2. Not enough movement: the stock rises but not past break even.
3. Too slow: the stock eventually rises, but after expiration. Time decay erodes value every day. See Theta.

A fourth risk is a fall in implied volatility, which lowers option prices even if the stock does not move. This is common after earnings. See Volatility Crush and Expansion.

Choosing strike and expiration#

A common guideline is to buy more time than you think you need, and to choose a strike near where you expect the stock to be, with the stock reaching it well before expiration. See Strike Price and Option Expiration Dates.

Managing a long call#

• Take profits when the target is reached rather than holding to expiration; time value left in the option is captured by selling.
• Cut losses if the thesis breaks, for example at 50% of the premium.
• Roll up a winning call to a higher strike to take money off the table.
• Convert to a spread by selling a higher call against it, which locks in some gain and reduces risk. See Bull Call Spread.

Sizing#

Because the whole premium can be lost, size long calls so that a total loss equals the amount you are willing to risk on the trade, such as 1% of your account. Do not size by the number of shares the call controls. See Position Sizing.

Common mistakes#

• Buying far out of the money weekly calls that need huge moves quickly.
• Holding to expiration and letting time value decay to zero.
• Buying calls when implied volatility is very high, such as just before earnings.
• Over sizing because each contract looks cheap.

Frequently asked questions#

What is a long call?#

Buying a call option, which gives the right to buy the underlying at the strike price before expiration. It profits if the price rises above the strike plus the premium.

What is the maximum loss on a long call?#

The premium paid. If the option expires out of the money, it is worth nothing.

When should I buy a call option?#

When you expect a meaningful rise within a specific timeframe and want limited risk. Consider implied volatility and choose enough time for the move to happen.

Next, see the other side of the trade in Short Call.