Wednesday, 10 April 2013

Long Call - Bullish Trading Strategies

Buying Call: 


Buying or Going long in a call option is strategy employed when option trader thinks market is in bullish direction moving up in the short term.

Buying call options / Long Call Options When applied correctly, it allows even beginner option traders to consistently make more profits than losses. Being long on a call option means the option trader will benefit if the underlying stock/index rallies, however, the risk is limited on the downside if the underlying Stock/Index makes a correction.
In Indian Terminology we would say a call is purchased when a trader feels market will be in Teji,

Nifty Options Buy Call            
Buy 1 ATM Index Call

Investor View: Bullish on Index or Stock

Risk: Limited to Premium + Brokerage + Statutory Charges Paid

Reward: Unlimited Profit Potential

Illustration:

Nifty Closing Price @
Profit/Loss
5300
-6300
5400
-6300
5500
-6300
5600
-1300
5700
+3700
5800
+8700




Long Call 


Index
Nifty
Nifty Lot Size
50
Underlying Strike Price
5500
Call Premium
  126/-
Breakeven Point
 5626/-


Maximum Profit: Unlimited
Profit Achieved when Nifty Settlement Value > Nifty Strike Price + Premium Paid
Profit : Nifty Spot Price – (Nifty Call Strike Price + Premium Paid)

Breakeven Point: Formula for Breakeven point
Breakeven point : Nifty Call Option Strike Price + Premium Paid

Example:

Believing that Nifty will advance in the near future, an options trader purchases a 25th April call with a strike price of 5500 for a quoted premium of `126/- per contract. With a contract multiplier of 50, the cost of the Nifty index call option comes to `6300/-

Suppose Nifty went to 5700 in April and the option trader Nifty April 5000 Strike Price call option expires in the money. At Settlement value of 5700, Nifty 5500 call option will possess an intrinsic value of `74/- and exercising this option will give the trader a settlement amount of `200/- (i.e 200 X 50 lot size). Taking in consideration the cost of option itself, which is ` 126/-, traders net profit comes to `74/- (200-126)

Suppose Nifty Settled down to 5400 in April and the options trader’s Nifty April 5500 Index Call expires out of the money, at the expiry date settlement value of Nifty @ 5400 , call option expires worthless with zero Intrinsic value resulting in net loss of premium paid 
For More Information about other strategies kindly click on below links
Guide To Options Basics
Long Put
Short Call 
Short Put
Long Straddle
Short Straddle
Synthetic Long Call