How long is the call

When investors expect or speculate a rise in the stock prices, they buy a call option because the probability of the market going up is high. In contrast, if the market price drops lower than the strike price, the long call holders lose the money they paid to enter the option agreement plus the premium. Therefore, a long call minimizes risk to the amount paid for the call and has an unlimited growth potential. Abis thinks that the stock price will increase because the company has completed a profitable deal with a competitive firm.

The market thinks that this acquisition will boost the profitability of both companies. Abis wants to increase his position in the stock, but he has no money. 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. 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.

The underlier price at which break-even is achieved for the long call position can be calculated using the following formula. Note: While we have covered the use of this strategy with reference to stock options, the long call is equally applicable using ETF options, index options as well as options on futures.

However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker. Traders who trade large number of contracts in each trade should check out OptionsHouse.

The following strategies are similar to the long call in that they are also bullish strategies that have unlimited profit potential and limited risk. Going long on out-of-the-money calls maybe cheaper but the call options have higher risk of expiring worthless.

In-the-money calls are more expensive than out-of-the-money calls but less amount is paid for the option's time value. Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time Cash dividends issued by stocks have big impact on their option prices.

This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement.

In place of holding the underlying stock in the covered call strategy, the alternative Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date