Call Option Strategy

A Call Option gives the buyer the right, but not the obligation, to purchase an underlying asset at a specified strike price before or at expiration. It’s a bullish strategy used when a trader expects the asset’s price to rise. Call options offer leveraged exposure with limited downside risk and unlimited upside potential.

Structure

• Long Call: Buy 1 call option (bullish outlook)
• Short Call: Sell 1 call option (bearish or neutral outlook)

Profit & Loss Profile

• Long Call: Max profit = unlimited; Max loss = premium paid
• Short Call: Max profit = premium received; Max loss = unlimited (if uncovered)
• Breakeven: Strike price + premium paid (for long call)

Ideal Market Conditions

• Use long calls when expecting a strong upward move
• Use short calls in flat or slightly bearish markets (preferably covered)
• Best when implied volatility is low for buyers, high for sellers

Example

A stock is trading at $100. You buy:

• 1 call option with a $105 strike for $2

Breakeven = $107. If the stock rises to $115, your profit = $8 ($115 - $105 - $2).

Risks & Considerations

• Time decay erodes value of long calls
• Short calls carry assignment risk and unlimited loss if uncovered
• Volatility shifts can impact option pricing