A long call option is a type of options trade that allows an investor to profit from an expected increase in the price of the underlying asset. In this trade, the investor purchases a call option contract, which gives them the right, but not the obligation, to buy the underlying asset at a predetermined price (the strike price) at any time before the option expires.
How does Long Call work?
If the price of the underlying asset increases above the strike price before the option expires, the investor can exercise their right to buy the asset at the lower strike price and sell it at the higher market price, resulting in a profit. If the price of the underlying asset does not increase above the strike price, the option will expire worthless and the investor will lose the premium paid for the option.
Benefits of Long Call
One of the main benefits of a long call option is the potential for significant profit with limited risk. Because the investor is only purchasing the option and not the underlying asset itself, their potential loss is limited to the premium paid for the option. Additionally, because the investor has the right, but not the obligation, to buy the asset at the strike price, they can choose not to exercise the option if the market moves against them.
Drawbacks of Long Call
One potential drawback of a long call option is that it is a bullish strategy, meaning it only profits if the price of the underlying asset increases. If the asset price decreases or remains unchanged, the option will expire worthless and the investor will lose the premium paid for the option. Additionally, the potential profit from a long call option is limited to the difference between the strike price and the market price of the underlying asset, while the potential loss is unlimited if the market moves against the investor.
