Long Calls Are an Option That Can Work

Here is a quick reminder to all option traders who have abandoned buying calls: Please don’t forget to consider them as an option so to speak. The first thing I personally learned as a brand-new option trader was a long call. I found it to be a great strategy when I expected to profit from a move higher in the stock for significantly less money than buying shares. Of course, as time goes by, and your knowledge increases, spreads usually become another choice for an option trader to consider and for good reason. But let’s not forget a long call has unlimited profit potential and there is always a chance the stock might rise more than you had envisioned.

Take a look below at a recent hourly chart of Apple Inc. (AAPL). The stock was just breaking a resistance level around $127.50 when a September (18 days till expiration) 127.5 call could have been purchased for 6.10 with a positive delta of 0.54. Less than two session later, the stock closed above $134 with the option now trading at 9.60. It had a profit of 3.50 (9.60 – 6.10) or $350 in real terms.

A long call with positive delta was a great way to profit from this extended move higher. A spread trade might not have given the position that big of positive delta. In addition, a long call also has positive vega and implied volatility levels increased over the 2-day period, which added to the call premium. Certainly, this will not always be the case. But with implied volatility rising for the overall market, it contributed to the profit. Spreads around the money generally have close to neutral vega positions. Some of my students took this trade idea, and several had returns of over 50% on the net risk in less than two days.

The bottom line is, when expecting a move higher, buying a call should not be downplayed but always considered as well as other options. It might just be a home run too.

John Kmiecik, Market Taker Mentoring

Trader Education