A long call option is a contract purchased on the stock market that allows the buyer the option to buy underlying shares of a particular stock at some point in the future if the stock price rises above a certain level. The price of the contract is the option price multiplied by 100, as the buyer would be required to buy 100 shares of the stock at the time the contract expires. Buyers may either choose to exercise the option at the completion of the contract or sell their option shares. If the price of the stock rises significantly, the buyer of a long call option stands to make a big profit.
Options trading can be a bewildering process for those who are new to it, but traders should consider it because of the potential for huge gains that dwarf what can be made by simply trading stocks. Trading options requires the ability to speculate on which way a stock is going to move and when it is going to make that move. For novice options traders, the long call option is the most popular trade, because the risk is minimized to the initial amount paid for the option contract and the potential rewards are significant if the stock price rises dramatically.
When someone purchases a long call option contract, he must be aware of the premium for the contract, the strike price, and the expiration date. The premium is the amount paid for the contract, and, because call options require a commitment to buy 100 shares of underlying stock to exercise the option, the quoted price is multiplied by 100. In terms of a long call option, the strike price is a predetermined price above the current price that the stock must reach before the buyer can exercise the option for a profit. Finally, the expiration date is the final date at which the buyer may exercise the option.
For example, imagine that a buyer purchases an option on April 1 to buy a stock at an options price of $5 US Dollars (USD), meaning that the initial premium payment is $500 USD. The stock's current price is $80 USD, and the strike price is set at $85 USD with an expiration date of May 1. This means that the investor can exercise the option at any point if the price reaches $85 USD per share, although the option doesn't actually realize a profit until the stock reaches $90 USD per share, which is the strike price plus the original option price.
Imagine that the stock price rises to $100 USD per share. One way to make money would be to exercise the long call option at the strike price of $85 USD per share and then sell the 100 shares of stock purchased at $100 USD per share, gaining a profit of $1,000 USD, which is the $1,500 USD stock swap difference minus the original $500 USD premium. Another way would be to sell the options contract, which would rise in accordance with the stock price. Either way, a long call requires the stock price to jump above the strike price before the contract expires, or else the contract is worthless.