You believe that the stock you have been researching is going to increase in price during a given time frame regardless of general market conditions. You are familiar with long stock positions but are wondering if there is a more efficient trade to use your available money to express this investment idea.

Options, a type of derivatives contract, are one possible solution for efficiently gaining exposure to stock performance. They are classified as derivatives because the value of the options contract is “derived” or based on the price of something else (in this case, a stock). Remember that with all choices there are risks and benefits that we need to fully understand. This allows us to make informed decisions before using products to express investment opinions.

Call options give the holder the right, but not obligation, to purchase a security (like a stock) at a predetermined price known as the strike price on a future date in time. Let’s explore this building block of financial choice in greater detail together.

Fun fact: Why is it called a “call”? Quite simply because the purchaser of a call option has the right to “call stock away” from the seller of the call option.

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What is a Long Call?

First, let’s learn options contract language to understand what we are buying when we purchase, or are “long,” a call option. Each standardized listed options contract has a minimum set of specifications that sets the terms of the agreement between the buyer and the seller:

• Quantity – The number of contracts you are purchasing
• Underlying – The security (stock, index, etc.) that the option’s value is derived from
• Expiration – The specific date and time an options contract expires
• Strike Price – The price at which an option can be exercised (or converted to the underlying)
• Type – Call or Put
• Price – The price that the option is bought (or sold) for
• Style – American (can exercise your right on or before expiration) or European (can only exercise your right on expiration)
• Settlement Style – Physical (the underlying security is delivered) or Cash
• Contract Multiplier – The number of underlying shares or units represented by one contract; for our examples we will assume a 100 multiplier, meaning each contract represents 100 shares or units of the underlying

With that in mind, we can now explore what it means to purchase a call or have a long call position. A long call is the right, but not the obligation, to purchase stock at the strike price on a future date in time.

When you purchase long call contracts, it will cost you money to establish this position. Let’s refer to this initial cost as the premium paid. The net premium paid also includes the price of the option plus fees and commissions.

As a strategy, the long call is considered a “single-leg” strategy because it utilizes only one options contract. As we build on our understanding, we will explore two-leg and multi-leg strategies as well.

Call options, by design, are capital-efficient ways to express a bullish opinion on a stock or the market; we anticipate value increasing and price rising. This is one benefit of long call options. The trade-off is that it costs money to purchase this access (right) to the unlimited upside potential of the underlying. Additionally, if your forecast is not right you can lose your investment very quickly and by expiration date. Another benefit of long call options is they limit your risk (or loss) exposure to declines in the underlying price, should the value of the stock decrease.

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Example

Buy 10 XYZ January 50 calls for $1.25

Assume the current XYZ stock price is $50

• Quantity – 10 contracts
• Underlying – XYZ stock
• Expiration – January
• Strike Price – 50
• Type – Call
• Price – $1.25 per contract
• Style – American
• Settlement Style – Physical shares
• Contract Multiplier – 100

How do we purchase the right to buy 1000 shares of XYZ stock for $50 in January?

Note: Total shares represented = quantity of options contracts x options contract multiplier = 10 x 100 = 1000)

You must first complete your transaction by paying $1,250 plus fees and commissions. This amount ($1,250) is considerably less than the $50,000 plus fees and commission that it would cost you to purchase 1000 shares of XYZ today.

Before we choose to complete the transaction to purchase long calls, let’s look a bit further at the decisions we face before and on the contract’s expiration date:

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‌-Powered by The Options Institute

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