OPTION LONG CALL STRATEGY
STRATEGY : LONG CALL
For aggressive investors who are very bullish about the prospects for a stock / index, buying calls can be an excellent way to capture the upside potential with limited downside risk.
Buying a call is the most basic of all options strategies. It constitutes the first options trade for someone already familiar with buying / selling stocks and would now want to trade options.
Buying a call is an easy strategy to understand. When you buy it means you are bullish. Buying a Call means you are very bullish and expect the underlying stock / index to rise in future.
When to Use: Investor is very bullish on the stock / index.
Risk: Limited to the Premium.
(Maximum loss if market expires at or below the option strike price).
Reward: Unlimited
Breakeven: Strike Price + Premium
Example :
Mr. XYZ is bullish on Nifty on 24th June, when the Nifty is at 4191.10. He buys a call option with a strike price of Rs. 4600 at a premium of Rs. 36.35, expiring on 31st July. If the Nifty goes above 4636.35, Mr. XYZ will make a net profit (after deducting the premium) on exercising the option.
In case the Nifty stays at or falls below 4600, he can forego the option (it will expire worthless) with a maximum loss of the premium.
| Strategy : Buy Call Option |
| Current Nifty index
|
4191.10 | |
| Call Option | Strike Price (Rs.) | 4600 |
| Mr. XYZ Pays | Premium (Rs.) | 36.35 |
| Break Even Point (Rs.) (Strike Price + Premium) |
4636.35 |
The payoff schedule
| On expiry Nifty closes at |
Net Payoff from Call Option (Rs.) |
| 4100.00 | -36.35 |
| 4300.00 | -36.35 |
| 4500.00 | -36.35 |
| 4636.35 | 0 |
| 4700.00 | 63.65 |
| 4900.00 | 263.65 |
| 5100.00 | 463.65 |
| 5300.00 | 663.65 |
The payoff chart (Long Call)
ANALYSIS: This strategy limits the downside risk to the extent of premium paid by Mr.
XYZ (Rs. 36.35). But the potential return is unlimited in case of rise in Nifty. A long call
option is the simplest way to benefit if you believe that the market will make an upward
move and is the most common choice among first time investors in Options. As the stock
price / index rises the long Call moves into profit more and more quickly.
