Option trading Strategy 1: Long Call

 When to use:

Call options give the buyer the right to buy the underlying stock at a specified price on or before a specified date (expiry date) when you think the market is very bullish you have to buy a call option. In general, the more out-of-the-money calls, the more bullish the strategy.

Long call strategy is buying the Call Option only. Any investor who buys the Call Option will be bullish in nature and he would be expecting the market to give decent returns in future. An options trader buy call options with the belief that the price of call option will rise significantly beyond the strike price before the option expiration date.

This is one of the basic strategies and it is most basic option strategy. A long call option is the simplest way to benefit if you believe that the market will make an upward move and is the most common choice among first time investors.

As a buyer of call options, you are hoping for the value of the underlying stock to rise. An increase in the price of the underlying stock will result in an increase in the value of your options.

The seller of call options receives a premium for taking on the obligation to sell the underlying stock to the buyer of the options at the strike price if the buyer decides to exercise the option before expiry. If the buyer exercises the option, the seller must sell the underlying stock to the buyer at the strike

Price. If the buyer does not exercise the option, the seller simply retains the premium and the obligation expires with the option on the expiry date.

Risk:

The risk of the buyer is the amount paid by him to buy the Call Option i.e. the premium value. Your risk is limited on the downside if the market makes a correction. Risk for the long call options strategy is limited to the price paid for the call option no matter how low the stock price is trading on expiration date. Loss limited to amount paid for option. Maximum loss realized if market ends below option exercise A.

Profit:

 The Profit will be unlimited as the underlying asset value can rise up to any value until the expiry. Since they can be no limit as to how high the stock price can be at expiration date, there is no limit to the maximum profit possible when implementing the long call option strategy.

Profit increases as market rises.

Example:

 Currently Nifty is trading around 8900  levels, and if you think the current level is bullish for Nifty and buys one 8900 Call Option (ITM) for Rs. 200 premium. Lot size is 25. The investment amount will be Rs. 5000. (200*25)

Case 1: NIFTY closes at 9200 levels you will make a profit of Rs. 2500. [(300-200)*25]

Case 2: NIFTY dips to 8900 levels you will incur a loss of Rs. 5000 (200*25) which is the premium you paid for buying one lot of 8900 Call Option.