Basic Options Strategies (Level 2) - Robinhood

What's a long call?

A long call is a bullish strategy that involves buying a call option. Long is a term describing ownership, meaning you hold the option. Owning a call option gives you the right, but not the obligation, to buy 100 shares of the underlying stock or ETF at the strike price by the option’s expiration date. Taking advantage of this right is called exercising your option.

A standard option controls 100 shares of the underlying stock or ETF. Therefore, you must have enough buying power to purchase 100 shares for each contract you exercise. Although you have the right to exercise your option, it may not always make sense to do so. Rather than exercising, many traders buy a call option with the intention to sell it later for a profit, before expiration.

When to use it

A long call is bullish. You might consider buying a call when you think the price of the underlying is about to go up and/or you expect a rise in implied volatility. Many traders buy calls because they’re generally cheaper than purchasing 100 shares of the underlying stock. However, there are tradeoffs to buying a call instead of shares of the underlying stock.

Building the strategy

To buy a call, pick an underlying stock or ETF, select an expiration date, and choose a strike price. After you’ve selected a call to buy, choose a quantity, select your order type, and specify your price.

When buying a call, the closer your order price is to the ask price, the more likely your order will be filled. If you prefer to work your order, you can choose a price that is closer to the mid or mark price (halfway between the bid and ask prices). It’s possible you might get a fill, but more likely, you’ll need a seller to drop their asking price. Note that if there are no bids, the mark price will show as $0.01.

Confirm your order details, and when you’re ready, submit the order.

The goal

A long call is typically used to speculate on the future direction of the underlying stock. When you buy a call, you want the price of the underlying to rise quickly and implied volatility to rise. As a result, the value of your call option may rise as well. This creates potential opportunities to sell your call for a profit before it expires. As with most long strategies, the goal is to buy low and sell high.

Cost of the trade

To buy a call option, you must pay the option’s premium. Let’s say, you purchase a call for $2. Since a standard option controls 100 shares of the underlying, you’d need $200 to purchase one contract. To buy 10 contracts, you’d need $2,000, and so on.

Factors to consider

• Look for an underlying stock or ETF whose price is trending up or likely to increase soon. Consider one on the lower end of its implied volatility range with potential to increase over the life of the trade. It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest.

• Choose an expiration date that aligns with your expectation for when the underlying price will increase. Technically, you can choose any available expiration date, but generally, the textbook approach is to buy a call with about 90 days until expiration. This provides more time for the underlying price to potentially rise while balancing costs and mitigating losses from time decay, which accelerate as expiration approaches. Shorter-dated calls are cheaper, but will be more impacted by time decay, while longer-dated calls are more expensive and more sensitive to changes in implied volatility.

• Which strike price you choose will determine the cost of your option, its sensitivity to changes in the price of the underlying stock, and the probability of it expiring in-the-money.

  • An in-the-money call is when the strike price is lower than the underlying stock price. It’s more sensitive to price movements of the underlying stock and has a higher probability of expiring in-the-money, but is more expensive.
  • An at-the-money call is when the strike price equals or is closest to the underlying stock price. It’s less expensive than an in-the-money option, but has roughly a 50% chance of expiring in-the-money. As the underlying stock price changes, an at-the-money option will move roughly half of that value.
  • An out-of-the-money call is when the strike price is higher than the underlying price. It’s less expensive than an in, or at-the-money option, but can be much less sensitive to price movements of the underlying stock and has a lower probability of expiring in-the-money.

  Note: As the underlying stock price changes, so can an option’s moneyness.

• The option’s premium (and how many contracts you purchase) determines your risk. Many traders adhere to the general guideline of not risking more than 2-5% of their total account value on a single trade. For example, if your account value was $10,000, you’d risk no more than $200-$500 on a single trade. Ultimately, it’s up to you to decide. Manage your risk accordingly.

How is buying a call option different from buying stock?

Although owning stock and buying a call are both bullish strategies, they have many differences:

• Stock represents ownership in a company, whereas a call option is a contract that represents the right to buy shares of the underlying stock or ETF. As a shareholder, you may have voting rights and be entitled to any dividends paid by the company. As the owner of a call option, you have no shareholder rights (unless you exercise and convert your call into shares).

• Options have an expiration date. This means there will be a day in the future when you can no longer trade or exercise your option. When you own stock, you can keep your shares for as long as the stock exists.

• A call’s price may not move dollar-for-dollar with the underlying stock. Even if the underlying stock price goes up, the option’s price may only go up fractionally, or possibly decrease, depending on certain factors.