Long Calls Can Work

Here is a short little 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 thought to myself that this is such a great strategy when I expect 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 daily chart of NVDIA Corp. (NVDA). The stock had a tendency to move higher several days ahead of its earnings announcement. It reversed off some support and moved higher all the way up until the day before the company was expected to announce quarterly earnings. A just in-the-money (ITM) call could have been purchased several days earlier, and then the stock moved about $25 higher during the course of just over a week.

A long call with positive delta and positive gamma would have been a great way to profit from this extended move higher. In addition, a long call has positive vega, which could have increased the call’s premium if implied volatility also rose, which is common as options get closer to their earnings date. Some of my students took this trade idea, and several had returns of more than 200% on the net risk.

The bottom line is, when expecting a move higher, always consider buying a call as well as other options. It might just be an expected home run too!

John Kmiecik, Market Taker Mentoring

Trader Education