Long Call
Buy 1 ATM Call
The Long Call (together with the Long
Put) is the most basic option strategy. It is a contract that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time. Buyers of Long Calls believe the underlying equity will rise in price before option expiration.
Compared to buying a stock outright, Long Calls provide unlimited profit potential with limited downside risk.
Consider the following hypothetical example for a stock trading at $27.52.
A $27 call option can be purchased for $0.91 for the current month. A profit is realized if the stock trades above $27.91 at option expiration; profit potential is unlimited. Below $27.00, a maximum loss is realized equal to the option price paid.
Click on Chart for Full Size View (in new window)
The opposite of this strategy is the Short Call (Sell 1 ATM Call). In this case, profit potential is limited to the premium received from the sale with unlimited loss potential.
