This chapter covers buying call options and will set the stage in later chapters for buying put options, selling options, and more advanced strategies. Buying a call is probably the most basic option strategy and the easiest to learn for a beginner because most individuals are familiar with buying an asset and profiting from its increase in value. A beginning option trader may want to start out by buying a call and then moving to other strategies. Buying versus selling options were covered in Chapter 5, so you may want to review that chapter for additional insights. This chapter will provide an overview of a long call, present numerous comprehensive examples, and then move to beyond the basics, including a discussion of the Greeks and rolling.
The beauty of the long-call strategy is its simplicity, as sometimes KISS is the best strategy: “Keep it simple, stupid.” A long call involves the purchase of a call option and is a bullish strategy. An advantage of a long call is that if the stock rises, you have unlimited profit potential with limited risk. A long call typically increases in value from a rise in the underlying stock and volatility expansion and declines in value from a decline in the underlying stock, time decay, and volatility contraction. Following is a summary profile of a long call:
Profit potential: Unlimited.
Risk: Limited to premium paid.
Time decay: Negative (theta).
Volatility: Increase is positive (positive ...