The Long Call, At-the-Money, is one of the most commonly used bullish option strategies.
Option Trading Subjects:
- Why Trade Stock Options?
- The Basics of Stock Options
- How to: Trading Stock Options
- How to read Option Graphs
- Option Trading Strategies by Outlook
- Vertical Spread Option Strategies
- How to: Diagonal Spreads
- Choosing a long option Strike Price
- Choosing an Option Expiration date
- Pyramid In or Average Out? : Option Buying Strategies, Option Selling Strategies
- Covered Call Strategies Disadvantages
- Percent to Double
- ETF Trading with Options
- Free Rides: Guaranteed Winning Trading Strategies?
- Delta-Neutral Trading Explained
- Stock Repair Strategy
- Stock Enhancement
- The Option Greeks
- Option Terms
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Strategy: Long Call, At-the-Money
The Outlook: very bullish. The stock must have a good percentage move by expiration for the call to break even. For a gain, the stock must move even more.
The Trade: buy call(s), using the strike price nearest the current stock price.
Gains when: stock rises enough by the expiration date to overcome the initial debit.
Maximum Gain: unlimited.
Loses when: stock goes down, does not rise, or does not rise enough by the expiration date to overcome the initial debit.
Maximum Loss : limited to the initial debit.
Breakeven Calculation: Strike Price + Initial Debit.
Advantages compared to stock: less capital required, increased leverage, "built-in" stop loss.
Disadvantages compared to stock: greater risk of 100% loss of the capital invested, no dividends, limited life, more stock movement needed to be profitable.
Volatility: after entry, increasing implied volatility is positive.
Time: after entry, the passage of time is negative.
Margin Requirement : None. Initial debit must be paid in full.
Variations: Long Call, ITM; Long Call OTM.
Synthetic Equivalent: Long Stock plus Long Put, ATM.
Comments
- ATM long calls with at least a month to expiration are used by "swing traders" trying to catch dips in an uptrending stock, with a one or two week holding period and a rise in the stock expected during that period.
- ATM long calls can be used by day traders trying to catch oversold points during a day's trading. Because the ATM long call will have a Delta of about .5, the day trader can possibly get about half the gain of the stock itself from that point, on much less investment.
- ATM long calls can be used by stock investors to buy possible "breakouts", using much less capital than buying stock. The investor can then exercise the calls on breakouts that work, and cut their dollar loss to less than buying stock on the breakouts that fail.
- A trader expecting the stock to have a nice uptrend over time might want to use ITM calls instead, and a longer time to expiration. A trader expecting a dramatic bullish price move any day might use OTM calls expiring soon. See the Choosing a Long Option Strike Price page for more information.
Exits
- Since this is a very bullish position, the trader is obviously expecting the stock to move higher. If the stock does not move higher, and the time to expiration gets to just a couple weeks, it is usually wise to exit the trade. In the position graph you can see the green time line showing that the position has lost about $60 if the stock stays at 50 for the first fifteen days, or a loss of about 30% on the $198 invested. If the trader continues to hold the position at that stock price until expiration, the loss would jump to more than three times that much, the entire $198 investment.
Adjustments
- Since a long call is a component of many other option strategies, a long call position can sometimes be adjusted or converted to those strategies.