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Options Trading Strategies
Long
Call
Buy Call
This
is one of the basic strategies as it involves entering into one position i.e.
buying the Call Option only. Any investor who buys the Call Option will be
bullish in nature and would be expecting the market to give decent returns in
the near future.
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The
long call option strategy is the most basic option trading strategy whereby the
options trader buy call options with the belief that the price of the
underlying security will rise significantly beyond the strike price before the
option expiration date.
For
a call option, you typically want to buy them when the stock is at or above
your selected strike price. Now, it’ll take some experience to determine which
strike price is best, depending on the stock. Some choose at-the-money, while
others may want to buy in-the-money or out-of-the-money options.
Now,
your break-even point at expiration is the strike price plus the premium paid.
The sweet spot here is if the stock explodes. Your max profit potential is
theoretically unlimited. A stock could continue running up endlessly, but we
haven’t seen that yet.
Calls
serve as an alternative to buying shares of the stock outright. Keep in mind
you shouldn’t go nuts with the leverage. If you’re comfortable with trading
only 100 shares, then stick with 1 call option contract. However, if you’re
comfortable and could afford to trade 1,000 shares of the underlying, maybe you
could buy 5 to 10 call options.
Risk
The
risk of the buyer is the amount paid by him to buy the Call Option i.e. the
premium value.
Reward
The
reward will be unlimited as the underlying asset value can rise up to any value
until the expiry.
Break-Even
Point
The
break-even point for the Call Option Holder will be ‘Strike Price + Premium.’
Long
Call Example
Just to refresh your memory, here’s a look at the profit and loss (PnL) diagram of a call option contract.
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Currently
NIFTY is trading around 11200 levels, and Mr. X is bullish on NIFTY and buys
one 11200 Call Option (ITM) for Rs. 133.75 premium. Lot size is 75. The
investment amount will be Rs. 10,031.25. (133.75*75)
Break-Even
Point:
Break-Even Point is 11,333.75 (11200+133.75)
Case 1: NIFTY closes at 11500
levels; Mr. X will make a profit of Rs. 12,468.75. [(300-133.75)*75]
Case 2: NIFTY dips to 11100 or below levels; Mr. X will incur a loss of Rs. 10031.25 (133.75*70) which is the premium he paid for buying one lot of 11200 Call Option.
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