CHAPTER 6
Long Calls
Buying calls (long calls) is one of the most common option strategies utilized by retail traders. There are two key reasons why this strategy is so popular: (1) unlimited profit potential and (2) smaller capital at risk. Unfortunately, it is also the strategy that we see most often misused by traders. Traders frequently buy call options as a way to supersize their rewards and minimize risk while throwing the probability of profit out the window.
A long call can serve as a stock replacement strategy or as a way to speculate on the upside movement of a stock, exchange-traded fund (ETF), or index. Understanding a call option and the correct use of this leveraged product is the first step in setting the foundation for more advanced strategies with higher probabilities of success discussed in other chapters. Fortunately, most traders can readily grasp the concepts behind long calls because they are intuitively very similar to the traditional long stock trade.
GETTING TO KNOW THE STRATEGY
In order to explain the concept in practical, everyday terms, let's use an example that hits close to home: the price of gas. Imagine for a moment a local gas station was selling fuel coupons for $25. The coupon allows the bearer to purchase 100 gallons of unleaded fuel at a price that is locked in to the market price at the time the coupon was purchased. The coupon expires on December 31. On the day you decided to purchase a coupon, the price of a gallon of unleaded fuel was $3.00 ...
