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The Long Call Strategy:
7 Effective Tips for Implementation

Long Call Strategy

Description

The long call strategy involves buying call options, betting on a stock’s increase. This allows investors to maximize potential gains while limiting risk to the premium paid.

Buying a call is one of the most basic of all options strategies. It is one of the first options trade you will take after gaining experience in buying and selling stocks.

A call is an option to buy, so obviously you are expecting the price of the underlying asset to rise.

ITM

In-the-money

Stock price > call strike price

ATM

At-the money

Stock price = call strike price

OTM

Out-of-the-money

Stock price < call strike price

Steps to Trading the Long Call Strategy

  1. Buy the call option

Remember:

  1. Each contract gives you the option to buy the number of the underlying asset as per the lot size. For example, for the HDFC BANK, buying 1 lot gives you the option to buy 1,350 shares of HDFC BANK.
  2. Options for the indices like NIFTY or BANKNIFTY are cash-settled. That is, if your call option closes ITM, you will be credited the amount of the profit and vice versa for OTM options.

Rationale

To make a better return than simply buying the stock. However, we need to make sure that we give ourselves enough time to be right. At least, 3 months, but ideally 6 months to a year. Although, this market may not always be liquid, at least in the Indian market.

Another method is to buy only deep ITM Calls.

Advantages:

  • Cheaper than buying the stock
  • Uncapped profit potential with limited risk

Disadvantages:

  • Potential 100% loss
  • High leverage can be dangerous if the stock moves against you

Exiting the Position:

  • Sell the call you bought

Mitigating a Loss:

  • Set a stop loss as per your trade plan. This could be based on the price of the underlying asset or the price of the option itself.

Cost

Price of the call

Maximum Risk

Call premium. 100% of your investment.

Maximum Reward

Unlimited as the stock price rises

Break-even

Strike price + Call Premium

Margin Required

No additional margin required

Effects of Time decay

Time is the enemy. Negative effect, especially in the week leading up to expiry

Effects of Volatility

After you are in the trade, you want the volatility to increase. Increased volatility will increase the price of your Call Option.

Expert Tips for Trading the Long Cal:

  1. Use Leverage wisely – although buying a Call Option costs substantially less than buying the stock, you can still lose your entire investment. A general rule of thumb is to buy as many units of a Call Option as the number of units of the stock you can afford.

If you can buy 100 units with your capital, buy 1 unit of Call (lot size 100).

If you can afford to buy 200 units of the stock, buy 2 units of Call.

Many traders use Call options for day-trading or swing trading. For this kind of trading, I always recommend you have a more comprehensive Risk Management system.

Read this article to understand how Risk Management works and how you can create your Risk Management strategy.

  1. Buy ITM Call – In the Indian stock market, very far-month options are usually illiquid. This means that buying an ATM or OTM Call is not a good strategy, since time is not on your side. In this scenario, buying an ITM Call is a better strategy. ITM Calls are more expensive, but they are worth the money you pay for them.
  2. Buying Call for Day Trading – Considering the nuances of the Indian Market, as discussed above, a popular strategy is to use call for day trading, as you would a stock. Use the charts of the Call itself to SET up your trades (Stop loss, Entry, Target). Options are usually more fast-paced than stocks since they control a larger asset. This provides for greater intraday gains. However, be careful of the volatility and have comprehensive risk management and market timing strategies.

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