Options strategy: Long calls

A long call simply means buying a call option to assume a long position on the stock or the option itself. A call buyer hopes that the price of the underlying stock would go up to realize profits. The loss potential of the call holder is limited to the premium paid to the call writer. A long call's profit potential is limitless as long as the price of the underlying stock keeps rising in price before expiration date. There are two ways to profit from buying calls, this is done by exercising at a higher strike price or selling back the option contract at a higher price.

Since options have an expiration date, gains generated from the continual rise of the underlying stock is limited by it. If the call buyer decides to roll over his option position, which involves the process of closing the existing contract and opening a new one with a higher strike price and a much longer expiration date, the call buyer would have to pay an extra premium for the new contract opened. By doing this, he still caps his loss potential to the premium paid but ends up paying more for the roll over as it involves opening another contract. However, if the call buyer is really sure that the stock would keep rising, he can avoid paying another premium from rolling over by just exercising the option. Exercising a long call means that the call buyer intends to purchase the underlying stock and hold it for a definite time period.

The risk involved in buying calls is when the underlying stock drops significantly in value, but since the call holder does not yet own the stock, he will not suffer losses from the price drop. The call buyer will not exercise the option because the strike price is at a level that will not generate profits. The price of the option will also drop in value to the point that selling it would incur losses for the call holder.

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