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Visually Analyze Option Strategies
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Long Call

Purchasing calls has remained the most popular strategy with investors since listed options were first introduced.

 

When purchasing a long call, you are purchasing the right to purchase the stock. You donít have to purchase the stock, but this option gives you the right to do so at a specific price. If the stock rises above the exercise price by more than the premium paid, you profit.

 

Market Opinion

 

Bullish to very Bullish. You are buying the call because you believe the underlying stock will rise.

 

P/L

 

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When to Use

 

When you are bullish on a certain stock and believe it will rise in price and want to capitalize on the profit you can make from that move.

 

Example

 

XXXX is trading at $28.88 on February 20, 2011.

Buy January 2012 $27.50 strike call for $4.38.

 

For $4.38 you bought the right to buy stock at $27.50.

 

Benefit

         

A long call option offers a leveraged alternative to a position in the stock, costing less than buying the underlying stock.

 

Risk vs. Reward

 

The risk is limited, while the profit potential is unlimited.

 

Net Upside

 

Unlimited upside.

 

Net Downside

 

Limited to the price you pay for the call.

 

Break Even Point

 

Strike price plus premium paid.

 

Effect Of Volatility

 

If Volatility Increases: Positive Effect

If Volatility Decreases: Negative Effect

         

Effect Of Time Decay

         

Negative effect. The time value part of the callís premium decays over time, accelerating as the call comes closer to expiration.

 

Alternatives Before Expiration

 

To avoid time decay, sell the long option before the last month of the contract.

 

If the stock falls under your stop loss, close out by selling the calls.

 

Alternatives At Expiration

 

Sell an in-the-money call. Or exercise the call and buy the stock at the strike price.

 

                          

 
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