[Music]
hey everybody Chris here for project
option and in this first option strategy
video we're going to talk about the
bullish strategy of buying call options
so let's get right into it
okay so buying calls also known as being
long calls in some instances is a
strategy that consists of buying a call
option on the stock that a trader
believes will increase in price so
buying call options is a very bullish
strategy now when you're buying call
options the maximum profit potential is
unlimited because there's really no
limit for how much a stock price can
increase now in regards to loss
potential the most you can lose when
buying a call option is the premium that
you pay for that option so the
worst-case scenario when you buy any
option is that the option expires
worthless in which case you lose the
premium that you pay so the expiration
break-even price when buying a call
option is the call options strike price
that you purchase plus the premium that
you pay for that call so for instance if
you buy a call option with a strike
price of 100 and you pay three dollars
for that option the expiration
break-even price is 103 dollars now the
estimated probability of profit when
buying a call option is theoretically
less than 50% now that's because when
you buy a call option your breakeven
price will often be a little bit more if
not significantly more than the current
stock price so what that means is that
you need the stock price to increase by
a certain amount just to break even and
for that reason buying call options is a
lower probability trade now if the call
option is in the money at expiration
each call option will expire to 100
shares of long stock so if you own a
call option at the strike price of 100
and the stock price is greater than 100
at expiration you'll effectively buy a
hundred shares of stock at $100 per
share if you let that option expire in
the money now in regards to assignment
risk there is no assignment risk
because the only time you can get
assigned is if you're short in options
so when you buy an option you're the one
that has all the control over exercising
and therefore when you buy a call option
you have no worries about getting
assigned so now that you know the basic
strategy characteristics of buying call
options let's go ahead and look at a
hypothetical long call trait and then
examine its expiration risk profile so
here we're looking at a hypothetical
option change so we're looking at
various cost strike prices and the call
price so let's say at the time of these
these option prices let's say the stock
price is currently trading for $100 and
we think the stock price is going to
increase so we're going to buy the call
option with a strike price of 100 and
we're going to pay a $5 premium for that
option let's go ahead and take a look at
what the expiration risk profile looks
like for this position okay so as we can
see here we have a lot of upside
potential and we have limited downside
potential so in this case we're buying
the call option with a strike price of
100 so at any price equal to or below
100 this option will expire worthless at
expiration which will result in a net
loss of $500 now that's because we
bought the call option for $5.00 premium
and that $5.00 is in is an option term
so can to convert that option price into
an actual dollar amount we multiply the
five dollar premium times 100 so the
most we can lose is $500 if the stock
prices at $100 or below at expiration
now as we said before the breakeven
price is the strike price plus the
premium we pay so we we paid $5.00 for a
call option with a strike price of 100
so 100 plus 5 is 105 so as you can see
here if the stock price is right at 105
at expiration we're going to break even
on this trade because that 100 call
option is going to expire with 5 dollars
of value now at any price above 105 we
start to see profits so for instance if
the stock price is at 115 dollars at
expiration
that 100 call option is going to be
worth $15 and since we paid $5.00 for it
we're going to have a profit of $1,000
so that's $15 minus the $5 we paid for
it times 100 which gives us the profit
of $1,000 now as we can see here the
long call strategy has limited lost
potential but unlimited profit potential
so in any trading strategy the
relationship between potential profits
and potential losses can help you
determine what the probability of making
money on that trade is so in this case
since our loss potential is small and
our profit potential is large we have a
lower probability of profit now another
thing that can help explain the low
probability of profit is that we need
the stock price to increase by a certain
amount just to break even at expiration
or make any money so to help you
understand how a long call strategy
makes money through time we have to look
at the Greek exposures so let's take a
look at a long call options Greek
exposures so starting with Delta a call
option and long call option position has
positive Delta because as stock prices
rise call option prices rise which is
good for call buyers and when the stock
price Falls call prices also decrease
which is not good for call buyers so the
positive Delta means that we want the
stock price to increase now a long call
option strategy has positive gamma
because as the stock price increases the
position Delta of the long call is going
to increase as well now when you combine
the positive Delta and positive gamma
together those two things tell you that
you want the stock price to increase in
an explosive manner now that's because
if the stock price increases you're
going to make money from your deltas but
your Delta is also going to increase as
the stock price increases now if your
Delta increases that means for the next
one point increase in the stock price
you're going to make more and more money
than you did for the previous $1 move in
the stock price now as we talked about
briefly before call option prices and
all option prices for that matter
decrease as time passes so a long call
position will have negative theta now
that negative theta is in
to you that since the call options
extrinsic value is decaying away as time
passes that call options price is going
to be decreasing which means all else
being equal if the only thing that
happens is the passage of time you're
going to lose money from owning a call
option because that extrinsic value that
you purchased is withering away now the
last thing is a long call option has
positive Vega which means that if
implied volatility increases that's an
indication that option prices are
increasing and an increase in option
prices when you own an option is a good
thing on the other hand following
implied volatility is an indication that
option prices are becoming cheaper and
cheaper which means you're losing money
if you own that option so a long call
option position has a positive Vega so
when you put all four of these Greeks
together we learn that a long call
position profits when the stock price
and or implied volatility increases
enough to offset these losses from the
passage of time all right let's move
away from theory and let's look at three
specific call options that actually
trade it in the market so the first
example we're going to look at is a long
call that suffers from time decay so
we're going to look at an example where
a trader buys a call option and the
stock price doesn't really go anywhere
and they suffer losses from the passage
of time so here's the trade setup the
initial stock price is a hundred and
five dollars the initial implied
volatility is 30% we're going to buy the
105 call option that expires in 31 days
and we're going to pay a $3 and 40 cent
premium for that option so as we know
our breakeven price is the call strike
of 105 plus the $3 and 40 cent premium
we paid which gives us a breakeven price
of 1 8 108 40 at expiration now as we
know the profit potential is unlimited
and the maximum loss potential is the
amount we paid for the option which is 3
dollars and 40 cents and if we convert
that to actual dollar terms
the maximum loss potential is 340
dollars so let's go ahead and take a
look at what happens to this call option
position as the stock price moves
through time
all right so as we know we bought the
105 call options for a 3.40 cent premium
now on the top part of this graph we're
looking at the stock price in relation
to the long call strike that we
purchased and the break-even price and
on the bottom part of the graph we're
looking at the actual changes in the
options price so as we can see here the
stock initially jumped from 105 up to
right around our breakeven price of 108
40 now as that stock price increased the
call options price also increased
because as we just talked about a call
option has positive Delta which means
that as the stock price increases the
call options price should increase as
well now unfortunately that move was
short-lived and the stock price came
down and kind of just you know remained
around the long call of strike price for
the remainder of the trade period and as
we can see the calls price slowly and
slowly withered away and eventually
expired worthless at expiration because
the stock price was below the called
strike price of 105 at the time of
expiration so any trader that bought
this call for 3 dollars and 40 cents and
held it to expiration lost three hundred
and forty dollars now you don't have to
hold options to expiration you know what
if you bought this option and then you
sold it after that first move you could
have sold the option when it was worth 4
dollars and 50 cents in the open market
so since you bought it for 3 dollars and
40 cents if you sold it for 4 dollars
and 50 cents you would have locked in
one dollar and 10 cents of profit which
translates to 110 dollars profit per
call contract so keep in mind that you
don't always have to hold options to
expiration you can always get out early
to lock in profits or losses so let's go
ahead and take a look at another example
of a long call strategy so in this next
example we're going to look at a long
call strategy in relation to the stock
price that's a little more volatile this
time so here's the setup
the initial stock price is 200 $1.02
initial implied volatility is 21% we're
going to buy the 190 call expire
in 46 days and we're going to pay a $13
and $0.38 premium for that option so
since the stock price is at 201 and
we're buying the 190 call we're actually
buying an in the money call option so
the break-even price of this strategy is
the 190 call strike
plus the 1338 debit that we paid which
gives us a breakeven price of 203 38 so
the stock price in this case only has to
rise about two dollars for us to reach
our breakeven price now as always with
the long call strategy the profit
potential is unlimited and the maximum
loss potential is the $13 and 38 premium
times 100 which comes out to a maximum
loss of one thousand three hundred and
thirty-eight dollars so let's go ahead
and take a look at this option position
through time so on the top part of the
graph again we're looking at this stock
price relative to the call strike price
that we purchased and the breakeven
price of the strategy so initially we
bought the call when it had you know
plenty of intrinsic value
now intrinsic value is what the option
would be worth if the stock price
expired at that specific price at
expiration so initially the call option
had over $10 of intrinsic value but
unfortunately the stock price actually
decreased now since a call option has
positive Delta the decrease in the stock
price results in a lesser and lesser
call price so as we can see here we
purchased the option for $13.38 and
unfortunately it never traded at that
price again and at expiration the stock
price was just above our strike price of
190 so the call option did expire with
some intrinsic value however the
intrinsic value that is expired with was
significantly less than the $13.38 that
we bought the option for so the bottom
line is that if you buy a call option
and the stock price decreases you're not
going to have a great time because that
call option has positive Delta and as
the stock price decreases so will the
value of your call option
all right in this last example we're
going to look at a profitable call
option purchase so a profitable call
option purchase looks something like you
buy a call option and the stock price
rises significantly so here's the setup
the initial stock price is ninety four
dollars and two cents
the initial implied volatility is thirty
one percent and the call we're going to
buy is the ninety two and a half call
that expires in 42 days we're going to
pay a four dollar in sixty five cent
premium for that option which brings our
breakeven price to ninety seven fifteen
so that's ninety two and a half plus the
four sixty five premium which gives us
ninety seven 15 as always the maximum
profit potential on this long call trade
is unlimited and the maximum loss
potential is that for sixty five premium
times 100 which gives us a maximum loss
per contract of four hundred and sixty
five dollars now let's go ahead and take
a look at how this call option positions
fares as the stock price changes alright
so again in the top part of this graph
we're looking at the changes in the
stock price relative to the call strike
that we purchased and the break-even
price of this long call position on the
bottom part of the graph we're looking
at the call options price relative to
the changes in the stock price so
between forty two days and eighteen days
to expiration we can see that the stock
price is actually increasing but the
call options price is you know remaining
right around that 465 mark that we
bought it for now as we know call
options have positive Delta and negative
theta so since the stock price is
increasing you should be making money
from that increase in the stock price
but what we're seeing here is the
profits being offset by the negative
theta of the position so essentially
what I'm saying is the stock price was
increasing just enough to offset the
losses from theta decay and therefore
the call options price remained
relatively flat over that first period
however between eighteen days to
expiration and zero days to expiration
to stock price takes off and basically
rallies from $97 up to around a hundred
and six dollars so a nice increase there
and as we can see the ops
price also increases now at expiration
this call option is worth just over $12
and since it was purchased for four
dollars the value effectively tripled
over this period now keep in mind this
is a significant stock price increase
relative to the expected stock price
change over that time period so this
example really just demonstrates that
when you buy a call option you really
need a significant increase in the stock
price otherwise if the stock price just
kind of increases steadily you could
still lose money because that those
losses from time decay could offset your
directional profits all right well that
pretty much wraps up this lesson on
buying call options so let's go ahead
and recap the summary of main points so
buying calls is and strategy that's used
by traders who have a strong bullish
outlook for our particular stock now I
say strong bullish outlook because as we
just saw unless the stock price
increases significantly a long haul
position is generally going to lose
money now buying a call option has
limited lost potential and unlimited
profit potential but that translates to
a lower probability of profit a trader
who buys a call options benefits from
increases in the stock price or implied
volatility but is harmed by the decay of
the options extrinsic value as time
passes so the stock price or IV must
rise in a short period to offset time
decay and we just saw that in that last
example to close the long call position
before expiration you can just sell the
call option at its current price to lock
in profits or losses so if you buy a
call option and it's not going your way
and you want to get out of that position
you don't have to hold the expiration
you can just sell the call options be
done with it
take your loss move on the same is true
if the stock price increases and you
want to lock in and profit and lastly if
a trader holds it in the money call
option through expiration they'll end up
with 100 shares of stock per contract
thank you so much for watching this
video everybody I hope you learned a lot
about my call options and if you found
this video informative and if you
enjoyed it please share with others and
don't forget to subscribe to our channel
so that you can receive all of our
YouTube videos as they come out
you