Long Call

If you are long a call, that means that you own the call or the right to buy the underlying stock at a predetermined price. When you are long a position that simply means that you have bought that position and want that position to increase in value. Being long a call means that you are bullish on the underlying stock and expect that stock to increase in value before your expiration date. Being long a call can be better then simply owning the underlying stock because you can using leverage to better your outcome in the event that you are right. Each call option that you own is equal to 100 shares of stock.

Example:

Potash Corporation of Saskatchewan (POT) currently trading at 205.24 and have 200 or 210 options available for May. The 210 options currently trade at 13.70 x 13.90 which is the Bid Ask spread. Since we are going to belong the call we are buying the call and when you buy an option you are buying at the Ask. So one option for May’s expiration is going to cost use 13.90 or $1,390. Remember options are always shown as the price per each share but each contract is 100 shares so you have to multiply the displayed price by 100.

Our chart shows here that we need this highly volatility stock to move up $28.65 by expiration for us to break even. If the stock price stays below $210 then we would loose all our premium paid for this option. If however, the stock price is above 210 by expiration we would make the price of the stock minus the strike price back. So to make a profit we need this stock to finish over 223.90 to earn a profit. Which in this case is possible because we have earnings between now and expiration.

The power of leverage when it comes to return is that you risk less when you are wrong and earn more when you are right. Here is a chart that compares buying the stock to buying the option at the same price for the same amount of share. If we are right and POT does well and earnings beat expectations and the stock goes to $250.