The long call option strategy is the most basic option trading strategy whereby the options trader buy call options with the belief that the price of the underlying security will rise significantly beyond the strike price before the option expiration date.
Buy 1 ATM Call
Leverage
Compared to buying the underlying shares outright, the call option buyer is able to gain leverage since the lower priced calls appreciate in value faster percentagewise for every point rise in the price of the underlying stock
However, call options have a limited lifespan. If the underlying stock price does not move above the strike price before the option expiration date, the call option will expire worthless.
Unlimited Profit Potential
Since they can be no limit as to how high the stock price can be at expiration date, there is no limit to the maximum profit possible when implementing the long call option strategy.
Unlimited
Profit achieved when: Price of Underlying >= Strike Price of Long Call + Premium Paid
Profit = Price of Underlying - Strike Price of Long Call - Premium Paid
Limited Risk
Risk for the long call options strategy is limited to the price paid for the call option no matter how low the stock price is trading on expiration date.
Premium Paid + Commissions Paid
Loss occurs when: Price of Underlying <= Strike Price of Long Call
Breakeven point
Strike Price of Long Call + Premium Paid
Example
Suppose the stock of XYZ company is trading at $40. A call option contract with a strike price of $40 expiring in a month's time is being priced at $2. You believe that XYZ stock will rise sharply in the coming weeks and so you paid $200 to purchase a single $40 XYZ call option covering 100 shares.
Say you were proven right and the price of XYZ stock rallies to $50 on option expiration date. With underlying stock price at $50, if you were to exercise your call option, you invoke your right to buy 100 shares of XYZ stock at $40 each and can sell them immediately in the open market for $50 a share. This gives you a profit of $10 per share. As each call option contract covers 100 shares, the total amount you will receive from the exercise is $1000. Since you had paid $200 to purchase the call option, your net profit for the entire trade is therefore $800.
However, if you were wrong in your assessement and the stock price had instead dived to $30, your call option will expire worthless and your total loss will be the $200 that you paid to purchase the option.
Commissions
These examples exclude commissions and fees. Include all transaction costs when evaluating the profit or loss of a position.
Similar strategies
Out-of-the-money Calls
Going long on out-of-the-money calls maybe cheaper but the call options have higher risk of expiring worthless.
In-the-money Calls
In-the-money calls are more expensive than out-of-the-money calls but less amount is paid for the option's
time value.