How to Use Options to Beat the Market
Long Call Options Everything You Need to Know June 14, by Brian Mallia Long Calls - Definition Investors will typically buy call options when they expect that a underlying's price will increase significantly in the near future, but do not have enough money to buy the actual stock or if they think that implied volatility will increase before the option expires - more on this later. A call is an option contract that gives the purchaser the right, but not the obligation, to buy stock at a certain price called the strike price.
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If the stock goes up, the value of the call contract also goes up. If the stock goes down, the value of the call option goes down.
Think of buying call options like this, keeping in mind that this is a slightly simplified example: You have an inclination that GOOG ticker symbol for Google is going to increase quite a bit because they have a new product rolling out. Buying one call option contract allows you to control shares of stock without owning them outright, for a much cheaper price.
Because you don't have enough money to exercise the option, you would choose to take the profits and close the trade out. Unlike owning stock which has no expirationowning a call could result in either a full loss of the call's value, or unlimited profit potential at expiration.
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The purchaser is not obligated to buy the stock at expiration because they can sell the call at any point in time as long as the underlying is liquid enough. The drawback of owning a call is that there is no long-term residual value.
Now that you understand the basics of buying call options, let's dig into how the purchase of a call option affects the amount of money in your account aka your buying power. Buying Power Reduction The fastest ways to make a million a brokerage account, the buying power reduction of buying a call is equal to the debit cost paid to put on the trade.
Options allow for potential profit during both volatile times, and when the market is quiet or less volatile. When you sell an option, the most you can profit is the price of the premium collected, but often there is unlimited downside potential. When you purchase an option, your upside can be unlimited and the most you can lose is the cost of the options premium. Depending on the options strategy employed, an individual stands to profit from any number of market conditions from bull and bear to sideways markets.
It's that simple. Buying power reduction is equal to the debit paid for the trade as seen on the tastyworks trading platform Now, let's take a look at when your long call will be profitable and when it will expire worthless. A long call can be purchased in the money or out of the money, which I will explain next.
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See the below example for a visual. This holds true for both in the money long call options as well as out of the money long call options. Now that you grasp when a long call will be profitable and when it will lose money, let's discuss the ideal conditions for placing a long call option.
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IV Rank as displayed on tastyworks' trade page. Why is this? The debit paid the price paid for the option will be less for underlyings with a low IV rank as opposed to a high IV rank.
As implied volatility increases, the market is indicating a greater expected range of the movement in the underlying. Therefore, option sellers demand a higher premium because underlyings with a high IV rank are much more likely to have larger price shifts and vice versa.
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Exercise the long call - receive shares of stock at the strike price of the option. The exit strategy depends on the goal of the investor, but for investors who do not have the capital required to buy the stock, options 1 and 2 are the only options no pun intended.
At any point, you have the right to exercise the long call and buy the shares what time is it better to work on options upon when undertaking the option contract, but you do not have to exercise this right. If you have additional questions about long calls, drop it in the comments sections or shoot our support team an email at support tastytrade.