Long Call Market Outlook

A long call is purchased when the buyer believes the price of the underlying asset will increase by at least the cost of the premium on or before the expiration date. Further out-of-the-money strike prices will be less expensive but have a lower probability of success. The further out-of-the-money the strike price, the more bullish the sentiment for the outlook of the underlying asset.

How To Set Up A Long Call

A long call position is initiated when a buyer purchases a call option contract. Calls are listed in an option chain and provide relevant information for every strike price and expiration available, including the bid-ask price. The cost to enter the trade is called the premium. Market participants consider multiple factors to assess the value of an option’s premium, including the strike price relative to the stock price, time until expiration, and volatility. 

Long Call Payoff Diagram

The payoff diagram for a long call is straightforward. The maximum risk is limited to the cost of the option. The profit potential is unlimited. To break even on the trade at expiration, the stock price must exceed the strike price by the cost of the long call option.For example, if a long call option with a $100 strike price is purchased for $5.00, the maximum loss is defined at $500 and the profit potential is unlimited if the stock continues to rise. However, the underlying stock must be above $105 at expiration to realize a profit. 

Entering A Long Call

To enter a long call position, a buy-to-open (BTO) order is sent to the broker. The order is either filled at the asking price (market order) or at a specific price an investor is willing to pay (limit order). The call option purchase results in cash debited from the trading account. 

• Buy-to-open: $100 call

Exiting A Long Call

There are multiple ways to exit a long call position. Anytime before expiration, a sell-to-close (STC) order can be entered, and the contract will be sold at the market or a limit price. The premium collected will be credited to the account.If the contract is sold for more premium than originally paid, a profit is realized. If the contract is sold for less premium than originally paid, a loss is realized.If the long call option is in-the-money (ITM) at expiration, the holder of the contract can choose to exercise the option and will receive 100 shares of stock at the strike price. If the long call option is out-of-the-money (OTM) at expiration, the contract will expire worthless and the full loss is realized.