Long Call Option: Profit Calculator and Payoff Visualizer

What is a Long Call Option?

The long call strategy in options trading is as bullish as it gets. This strategy allows traders to leverage their capital with limited risk, as the maximum loss is limited to the option premium paid. 

However, the time decay factor poses a significant risk, particularly for out-of-the-money (OTM) options. It is not unusual for OTM call options to decline in value even as the underlying asset's price rises.

Long Call: Payoff Diagram and Calculations

Here are the straightforward payoff calculations for the long-call options trading strategy. 

Long Call Max Profit

• Formula: Theoretically unlimited
• Explanation: Since a stock price can theoretically rise infinitely, long call options have unlimited maximum profit potential.

Long Call Max Loss

• Formula: Premium paid
• Explanation: The max loss on long options is always the debit paid. This occurs if the option expires worthless, meaning the underlying asset price remains at or below the strike price at expiration.

Long Call Breakeven Point

• Formula: Strike price + premium paid
• Explanation: To reach breakeven on a long call, the price of the underlying asset (eg, underlying stock price) must exceed the strike price plus the premium paid. 

Types of Long Call Options

There are two different types of option contracts: American-style and European-style options. 

American Style Options

Most stock and ETF options are American-style, meaning they allow for early exercise. This flexibility exists because these options are tied to tradable underlying securities, like stocks or ETFs.

European Style Options

Most index options are European-style, meaning they can only be exercised at expiration. This structure is common for indices like SPX (S&P 500 Index) and NDX (Nasdaq-100 Index), which do not have an underlying tradable security.

Because these options are cash-settled, early exercise would provide no benefit. Instead, the final settlement value is determined at expiration based on the index level at that time.

Call Options and Moneyness

Like all options, call options can exist in one of three moneyness states. While all call options are inherently bullish, their moneyness state indicates the degree of bullishness.

At-the-money (ATM)

ATM call options have a strike price equal to the underlying asset's current price. These options are a middle-ground choice: they cost more than OTM options but less than ITM options. 

While they initially lack intrinsic value, they offer a solid balance between risk and reward, making them ideal for traders expecting a moderate to very bullish price move. 

Out-of-the-money (OTM)

OTM call options have a strike price higher than the current stock price. These options have no intrinsic value, meaning their entire premium is extrinsic, influenced by implied volatility and time to expiration.

OTM options are the most cost-effective, making them ideal for traders with an extremely bullish outlook who want to take advantage of leverage with minimal upfront cost. 

It is also important to know that these options have the lowest probability of profit, as the underlying asset must move significantly in your favor to turn a profit.

In-the-money (ITM)

ITM call options have a lower strike price than the current stock price. Because of their high intrinsic value, these options have the highest premiums. 

If you are moderately bullish on an underlying, ITM call options provide a more stable return because they have a higher delta (sensitivity to price changes).

However, due to their high premium, these options carry the greatest overall risk but also offer the highest probability of profit. Deep ITM options mimic stock, which you can learn more about here!👇

Long Call vs Long Put

A long put option gives the owner the right (not the obligation) to sell the underlying asset and the strike price. For stock options, this means that the owner of a long put can exercise their contract and sell 100 shares of the underlying stock at the strike price. Long puts are essentially the exact opposite strategy of long calls. While long calls profit from a rise in the underlying asset's price, long puts benefit from a price decline.

Here’s a diagram comparing the long call and long put options trading strategy.

When Should I Use a Long Call?

The long call option strategy is best used when you are bullish on an underlying asset and expect its price to rise.

However, it's important to remember that time is not on your side when buying long calls (or long puts, for that matter). This is especially true for OTM call options.

As discussed earlier, OTM options consist entirely of extrinsic value, influenced by market volatility and time. As expiration approaches, this time value erodes exponentially, making it critical to time your trades carefully.

Let’s examine an example next to see how the passage of time negatively affects the price of long options.

Long Call Example

Let’s say you are bullish on SPY (SPDR S&P 500 ETF Trust) and expect it to rally over the next seven days. 

You pull up an options chain and purchase the 607 strike price OTM call option on SPY, as seen on the TradingBlock platform below.

Here’s our initial trade:

• Option Price (Debit Paid): $1.76 ($176 total)
• Symbol: SPY
• ‍Underlying Price: $603.70
• Strike Price: 607
• Days to Expiration (DTE): 7 days

Let's fast forward 4 days. It turns out we were wrong, and want to sell our call. Here's what's happened to our position:

• Symbol: SPY
• Underlying Price: $603.70 → $604
• Strike Price: 607
• Option Price: $1.76 → $0.99
• Days to Expiration (DTE): 7 days → 3 days

As we can see, our option premium has fallen significantly, even though the stock increased in value. This is due to what is called ‘time decay.’

Long Calls and Time Decay

This decline in value is due to time decay, or theta. When the trade was initiated, there were 7 days remaining for SPY to exceed the strike price of 607. With only 3 days remaining, there is less time for SPY to make the required move, reducing the likelihood of the option closing ITM.

Time decay accelerates as expiration approaches, particularly for out-of-the-money (OTM) options like this one, which consists entirely of extrinsic value (time and implied volatility). Here’s how this decay slowly ate away at our option premium:

Note that this example assumes implied volatility remains constant. If SPY experienced higher volatility, the price of all options would increase. Interest rates and other market conditions also play a role but to a smaller degree.

Explore Options With Virtual Trading

With TradingBlock’s Virtual Trading platform, you can trade options in a simulated environment. Check it out below today!

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⚠️  Besides the initial debit paid, it is essential to consider the commissions and fees associated with most options transactions when calculating net profit or loss. These fees can significantly impact the overall return on investment and should be factored into all trades placed. Please read Characteristics and Risks of Standardized Options before trading options.