Long Calls (Buying Calls)
A long call involves buying a call option, granting the right to purchase an underlying asset at a set price before or on a specific date. It's used by investors seeking to potentially profit from the underlying asset value increasing without owning it. Be mindful, options are considered high risk investments due to their complex nature.
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Following on from part one, here is a breakdown of long calls. If you’d like to check out part one: Options Terminology
Firstly, what is a long call? The purchase of a call option
A call option gives the buyer the right but not the obligation to buy a specified quantity of an Underlying Asset, such as 100 Apple shares, at a pre-agreed price (Strike Price) before or on a specific date (Expiration Date)
Calls are commonly used by investors seeking to potentially profit if the Underlying Asset value increases, without owning the asset
Example:
Apple shares are trading at $170.00
I can buy an Apple $175.00 (Strike Price) Call for $3.00 (Premium) that expires on 16th June (Expiration Date)
The contract contains 100 shares, resulting in a total premium of $300.00
To breakeven, Apple would need to increase to $178.00 (Strike Price + Premium) by expiration and anything above this would be considered profit
By expiration, if Apple’s shares are trading at $190.00, I have the right to buy 100 shares for $175.00 each
If I exercise my right to buy the shares for $175.00 and then sell them for $190.00, I have made $15.00 on each share
I have made $15.00 but paid $3.00 Premium for the call, so my profit is $12.00 on each share
Total Proceeds: $1,500.00
Total Premium: $300.00
Total Profit: $1,200.00
Remember! When investing you may incur additional costs such as broker and exchange fees.