To purchase a call option is known as a Long call. From this definition, it is clear that the buyer can purchase the security at a predetermined cost at a future date. The term itself means to buy a security or buy options.
Options are resources whose value is based on the basic benefit. Options trading is a resource that supports the dealers to have the option to purchase or trade securities at a prearranged cost in the future. The highest benefit of options trading is that the broker has the option but not the responsibility to practice that option. The dealer can select purchasing or trading securities, relying on whether his market views are exact or not.
When is it good to use a long call option?
When the trader is attracted to the market, he contracts to purchase the call option. Dealers expect the cost of security to rise in the next few years. But, he would not like to risk purchasing security directly.
In such a situation, it will be more effective for the buyer to purchase a call option on security. It means that the dealer has the option to purchase a security at a prearranged strike price on a particular date in the future. Now, when the cost of the security increases, as the trader estimates, he can purchase the security at a minimum strike cost and trade it at the highest price, and create a revenue.
But, when the security cost does not increase, rather it falls, the trader who stays long on the call option may select not to use his option. In such a situation, his only disadvantage is the premium as paid to purchase that call option. Therefore, staying on the call option for a long time, the revenue is infinite; on the other hand, the threats are restricted only to the total of premium paid.
As soon as the trader relies on the stock market’s long call options strategy for dealing, he must calculate his revenue or damage at the end of the trade. The dealer required a set of formulas to follow to make a reasonable estimate of these values. Suppose the trader create revenue in his dealing; then the calculation will be:
The revenue value of the basic advantage or security – paid a premium – strike price
Using this formula, the trader will deduct all kinds of cash from the cost of security and access a number that he will be returning home. But, if he is at risk in his trade, the calculation will be done for that reason.
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Loss Premium + Brokerage + Taxes paid
These are direct calculations, and the trader can simply calculate.
Expiration of long call in the cost
But the trader will be suggested to either extend the contract to the next expiration date or put a “sell-off” order and earn his revenue. However, when the long call for money ends, the call will be directly processed, and the shares in the lost will be shifted to him at the last strike price.
When the long call option runs out of money for a long time, then it will not matter. Such cases can occur if the stock price in the market is lesser than the strike cost on the day of long call option development.
The trader can apply the long call strategy to shares of a special company or NIFTY or bank NIFTY. The shares of Wipro are currently trading at ₹256 per share, and Mahesh longs a call option at the strike price of ₹280, at a premium of ₹20.
Assume that Mahesh, a consistent glass trader, is prosperous for the market and expects Wipro’s share price will rise in the upcoming future due to future free revenues.
Condition 1
Mahesh’s expectation comes precisely, and the value of Wipro’s share spreads ₹350.
Mahesh will practice his choice to purchase the option, and he will purchase the shares at ₹280 and trade them at ₹350, creating revenue of ₹70.
Thus net payoff will be ₹70-20 ₹50.
Keep it in mind that when the trader had really accepted the security rather than purchasing the call option, his risk could be infinite. Simultaneously, his risk potential would be infinite.
In this way, a long call strategy is applied to restrict risks while still maintaining the infinite potential for revenue.
Benefits of a long call option
Long call failures
As a result, a long call option strategy is a positive trading strategy when the trader is confident in the market. With the help of this strategy, he can earn infinite revenue; hitherto his losses can be restricted to the cost of premium paid.
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