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What is a Long Call?

 

Summary description: The holder of the call buys the right to purchase a certain quantity of the underlying instrument (a share, for example) at a certain price.
Price expectation: Rising prices for the underlying instrument, and increasing price fluctuations.
Profit potential: unlimited
Loss potential: limited to the premium paid = 100 percent of the investment

 

The chapters on option pricing explain why options become more expensive when price fluctuations increase, and why buyers of calls and puts benefit from this development.

Example:

Instead of buying a share at EUR 100, an investor decides to buy a call on this share at an exercise price of 100. The price for the option is EUR 4.

When the option expires in the future, profits and losses will be incurred, given the following different share price scenarios:

Share price upon expiration of the option Profit and loss for an initial purchase of shares Profit and loss of the Long call
120 +20 (+20%) +16 (20 – 4 invested premium), (+400%)
110 +10 (+10%) +6 (10 – 4 invested premium), (+150%)
104 +4 (+4%) 0 (4 – 4 invested premium)
100 0 -4 (invested premium), (-100%)
95 -5 (-5%) -4 (invested premium), (-100%)
80 -20 (-20%) -4 (invested premium), (-100%)

After buying the option, profits are generated once the share price moves higher than 104 (the break-even point). The loss is limited to the premium invested.

In percentage terms you can generate much higher profits and losses with options compared to simply buying the underlying instrument. This is because the lower capital investment associated with an option creates leverage.

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