One of the simplest options strategies is a long call, or simply the purchase of a call option. This is a trade that has unlimited profit potential, while the maximum loss is limited to the amount you pay for the option up front.
The best time to buy a call is when you are bullish on a stock. A long call becomes profitable when the underlying stock rises enough that the option price becomes higher than the price paid to enter the position.
The amount of premium will be higher for an option with an expiration date farther out in the future, and the amount of premium also increases as the strike price is closer to the stock’s current price.
A long call holder can hold his position until expiration and cash in by exercising the option and then selling the stock at its higher price, but most investors will choose to exit the position before expiration. Once the stock rises to a point of satisfying profits, the long call holder can sell the call, cashing in on any additional premium remaining on the option.
At expiration, if the underlying stock is below the call’s strike price, then the option will expire worthless and just disappear. The investor will lose the entire amount paid up front, but no more, even if the company behind the stock goes bankrupt.
The break-even point for a long call at expiration is the strike price plus the amount of premium originally paid for the option. This is also sometimes known as the target price. The higher the stock price climbs above the target price, the more the option is worth, thus the unlimited potential returns.
Even if the stock finishes at expiration below the target price, you can still get some of your capital back, as long as the stock is above the strike price.