What is a long call?
A long call strategy is initiated by buying call options without owning the underlying stock. The call options give you the right to purchase shares of the underlying asset at the strike price on or before expiration. When you buy options without owning the underlying, it is considered a levered investment, with each contract equivalent to holding 100 shares of stock.
The biggest advantage of using a long call option is that you need less money to own a single contract as compared to the amount of money needed to own 100 shares of stock. Another advantage of trading a long call strategy is that the downside risk is limited to the cost of the option contract.
When to use a long call strategy
People who buy call options believe that the underlying asset will rise significantly in the future. When you buy a call option, you are expecting that the price of the underlying asset will go up by at least the price of the option before it expires. The further out-of-the-money the strike price is, the less likely it is to happen, but also the less expensive the call option will be.
How to manage a long call position
Entering a long call strategy is akin to placing a bet that either or both price and the implied volatility of a stock are going to increase. If either of these bets pan out, it will make your option more valuable. When you hold a long call position, time decay is something you need to be aware of. This will cause the value of the option you bought to decrease over time.
If the underlying stock price falls and your trade moves against you, you can still sell a call option at a higher price to reduce your risk. This decreases how much money you lose on the original position. But it also means that you are at risk of losing additional money if afterwards the stock goes up.
Long call maximum profit potential
Theoretically, there is no limit to how much profit you could make on a long call. Your profit potential depends on how high the stock price rises.
Long call maximum loss potential
When you trade a long call strategy, your potential loss is limited to the amount you paid for the call option.