Option Strategies : Long Call

Strategies…! First question pops up in your mind is :

What is strategy?

Strategy is plan containing predefined rules, sole purpose of these rules are to achieve profitable return or hedging against loss.

In market there are many number of strategies we will be explaining certain number of strategies to you in upcoming post and to help with that we have with us Mr. Chavani..! He is experience trader and know many strategies so we will be taking his help to understand these strategies.

Bearish and Bullish, you might have heard these terms in market on regular basis but what does that mean?

Bearish and Bullish are behaviors of market towards underlying asset.
Let’s take an example of stock Boltztrade Ltd, suppose current stock price of Boltztrade is Rs 4500 and Mr. Chavani is thinking that market will be bullish about Boltztrade stock price, let’s understand using following graph.

As you can see at time 9:30 AM price of Boltztrade was Rs 4300 and at time 10:00 AM price is Rs 4500 market being bullish means price of underlying asset will be increasing, so you can see that as time increases stock price of Boltztrade is also increasing 10:15 AM it is Rs 4600.

Bearish is opposite behavior of bullish let’s take same example of Boltztrade current stock price Rs 4500, see the following graph.

Mr. Chavani is thinking that market will be bearish for Boltztrade. As you can see from graph stock price of Boltztrade. Ltd was Rs 4700 at 9:30 AM but as time goes on stock price is decreasing Rs 4600 at 9:45 AM , Rs 4500 at 10:00 AM and finally Rs 4300 at 10:30 AM.

Bullish : Market price of underlying asset will increase in future.
Bearish : Market price of underlying asset will decrease in future.
Now moving on toward our first strategy.

Long Call What is it?

Our Mr. Chavani has bullish character and he knows that by current market condition of Boltztrade Ltd will have great future ahead and price value of Boltztrade stock will increase, so to gain profit from this movement in price. He buys call option on Boltztrade and once it’s purchased, it’s called “Long”.

• Risk
  This strategy has maximum loss of option premium i.e. OTM(Out-The-Money)
• Profit
  This strategy has unlimited amount of cash in flow i.e. ITM(In-The-Money)
• Break-even
  This is a point where net profit is zero i.e. ATM(At-The-Money)

e.g. Mr. Chavani decide to buy call option for Boltztrade on 21 April 2018, when Boltztrade is at Rs 4690 . Call option has Strike price Rs 4700 and option premium is Rs 86 . If Boltztrade price goes above Rs 4786 then Mr. Chavani will have net profit after deducting option premium and if option goes below Rs 4700 then, he can forego option with maximum loss of option premium.

Let’s see the following graph.

So this is long call strategy useful when you know market will be bullish for underlying asset in future and you want to get profit from this movement.

In next post we will learn about Bearish market situation. Can we earn profit from fall of market ? Which strategy to use? How to use it? So many questions will be answered in next post till that time.

Adios Amigos!!

Best Wishes !!