Buying Long Calls – options trading for beginners (method 1)

Nithvik
3 Min Read
Buying Long Calls - options trading for beginners

Hi Friends, We already discuss options trading. In this article, we are going to see the Buying long Calls method from options trading. If you think the price of an asset will rise, you can buy a call option using less capital than the asset itself. Trading options have some advantages for those looking to make directional bets in the market.

Buying Long Calls
Buying Long Calls 
best long-term call options

If, however, the price falls, your losses are limited to the premium you paid for your options, so it might be an appropriate strategy for traders who:

  • You are confident about a particular stock, exchange-traded fund (ETF), or index fund and want to limit your risk exposure
  • Leverage to take advantage of rising prices

By using smaller amounts than would otherwise be needed when trading the underlying asset, options act as leveraged instruments in that they allow traders to amplify the upside benefit. Therefore, you could invest $2,000 in a call contract with a strike price 10% above the current market price instead of spending $10,000 to buy 100 shares of a $100 stock.

In a standard equity option contract, 100 shares of the underlying security are controlled.

long call example: Example for Buying Long Calls options trading for beginners

If a trader invests $5,000 in Apple (AAPL), which is trading at $165 per share, 30 shares can be purchased for $4,950 with that amount. If the stock price increases by 10% over the next month to $181.50, then the trader’s portfolio will rise to $5,445, leaving the trader with a net dollar return of $495, or 10% on his investment.

By purchasing an option with a strike price of $165 expiring in a month, and at the current cost of $5.50 per share or $550 per contract, the trader can purchase nine options for a total of $4,950. This will give them control over 900 shares as each option covers 100 shares.

If the stock price increases by 10% to reach $181.50 at the expiration date, this would mean that the option would be in-the-money (ITM) and worth $16.50 per share ($181.50 – $165), resulting in a total figure of $14,850 on the 900 shares controlled by these nine options – meaning they’d have made a return of 200% on their original investment of $4,950, far higher than if they had just bought and traded the underlying asset alone.

Risk/Reward in Buying Long Calls

A long-call trader’s potential loss is limited to the premium paid. The profit potential is unlimited because the option payoff increases with the underlying asset price until expiration, and theoretically there is no limit.

Before you enter into trading please go through INVESTOPEDIA 

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