The long call is a bullish strategy that lets you profit from a stock's rise without the full cost of buying shares. It's a way to participate in potential upside at a fraction of the price.

Imagine Facebook trading at $118. You're bullish but don't want to tie up a lot of capital. Instead of buying shares directly, you could buy a call option. Let's say a call option expiring in four months with a $120 strike price costs $5.45 per share.

One contract (covering 100 shares) would cost you $545. This gives you the right, but not the obligation, to buy 100 Facebook shares at $120 anytime before expiration.

So, instead of paying $11,800 for 100 shares, you control those shares at $120 for just $545 for the next four months. If Facebook rises to $130, you could (theoretically) buy at $120 and sell at $130, making a $10 profit per share. After subtracting the $5.45 option cost, your profit is $4.55 per share. In reality, you'd likely just sell the call option itself for a similar profit.

We'll use this Facebook example to show you how the long call is less risky than buying shares and how it can significantly boost your return on investment.

The long call strategy is constructed by buying a call option. An investor with this position can be said to be ‘Long’ a call.

A long call strategy will always be established at a net debit. In other words, it costs you money to buy a Long Call.

To establish a Long Call Strategy with FB options, an investor might buy 1 contract of the FB Mar 17th 2017 $120 call for $5.45 (ask price). The result is the investor holding 1 FB Mar 17th 2017 $120 call at a $5.45 net debit per share. Remember, we have a $130 target price on the stock. Looking at the costs below, you will see the immediate cost benefits of using a call option versus buying the stock outright.

The long call strategy is a very bullish position. We want the share price of FB to rise substantially between now and the expiration date on March 17th 2017.

In our Facebook example, we intend closing the position when Facebook gets to $130.

The maximum upside profit for a long call strategy is said to be ‘unlimited’. The further the share price of the stock rises above the break-even price, the more valuable the call option becomes. We therefore cannot define exactly the maximum profit when we buy a call option.

Profit = (Value of Call Option minus cost of Call Option) multiplied by (number of contracts purchased multiplied by 100)

I

n the FB example, if the value of the $120 call is $10 (at our $130 target price for the stock). Our profit will be:

= ($10.00 - $5.45) * 1 * 100

= $4.55*100

=$455

The max profit profile for the long call is similar to buying the stock, both are said to have unlimited profit potential. But comparing the profit potential if Facebook gets to $130, you will see that buying the stock is better.

Return on investment is calculated as follows: (Profit divided Cost of the Call Option) multiplied by 100. In our FB example, return on investment is:

= ($455/$545) * 100

= 83.49%

If we just invested in the stock at $118, the profit would be $1,200. Why shouldn’t we just do that? We would have made more profit, right?

The answer is yes, we would have made more profit but we also would have had to use a lot more capital and risk to make that profit. Remember to buy 100 shares of stock it would have cost us $11,800. Therefore, our return on investment if we invested in the stock would have been:

= ($1,200/$11,800) * 100

= 10.17%

The matrix below explains it well, we invest $545 to make $455 profit with the long $120 FB call or for the same scenario invest $11,800 in Facebook stock to make $1,200. On a risk to reward ratio basis the long call strategy wins easily.

As you can see from the above you have risked a lot less with the long call to make the profit, that is why the return on investment is so high.

The maximum downside loss for a long call strategy is ‘limited’ entirely to the net debit initially paid for it. This loss will be seen if Facebook closes at or below the $120 strike price of the long call at expiration, no matter how low the Facebook declines.

Maximum loss in our Facebook example = $5.45 debit paid, or $545 total

Again, comparing the Facebook long $120 call strategy to simply buying the stock at $118, you will see that there is a lot more at risk if we buy the stock. It is unlikely that Facebook shares will go to zero, but the risk of buying 100 shares of Facebook is technically $11,800.

Let’s say Facebook falls 10% in the next 4 months, if we invested in the stock we would have lost $1,180 versus only losing $545 by purchasing the call option. Buying the call option involves less monetary risk than buying the stock. See matrix below:

The break-even price for a long call strategy at expiration is a closing Facebook stock price equal to the strike price of the long $120 call plus the $5.45 debit paid for the spread.

At expiration, the break-even price for the Facebook $120 long call would be equal to $120 (strike price) + $5.45 (net debit paid) = $125.45. In other words, the share price of Facebook would need to be over $125.45 at expiry on March 17th for us to start making a profit.

This is one of the downsides of this strategy when you compare it to buying the stock. We need Facebook shares to move up $7.45 from the current price of $118 to make a profit with the FB long March 17th $120 call. Whereas, with the stock the breakeven price is the price you paid for the stock.

The matrix below illustrates this well:

There is a way to reduce the breakeven price for the long call which we will discuss in greater detail later. But it involves buying in-the-money calls. They are more expensive but they will reduce the breakeven price. This is a trade-off that you will need to consider and will depend on how bullish you are on the stock.

One of the major drawbacks of the long call strategy is the probability of profit before expiration. The long call strategy will have a probability of profit that will be lower than 50%. In fact, the further out-the-money the call option you purchase, the less chance you have of being profitable.

In the Facebook example, the probability of profit is just 38%. The probability of profit for purchasing the stock is 50%. As you can see from this example, the chances of profit are greater when you buy the stock versus buying the Facebook $220 call option. This is a major consideration for you and it should not be underestimated. See matrix below:

The reason that the probability is lower on the long call in this example, is because the break-even price for the long stock is lower than the break-even price of the long call.

This is one of the major reasons we much prefer the bull call spread strategy to the long call strategy.

Please note: if the share price rises soon after purchase of the long call there is a strong possibility of the long call being profitable. The reason is that there is ‘time’ value left in the call option. Our examples above assume that we are at expiration and that no ‘time’ value exists.

But you should still be aware of the total risks in each trade.

At expiration, if Facebook closes at a price between the break-even price and the $120 strike price, a partial loss would be seen. Above the break-even point there would be a profit.

Here is an example of a P&L table for the FB March 17th $120 Call Option:

Before expiration, an investor can take a profit or cut a loss by selling the call option if it has market value which will be done at a net credit. Profit or loss would simply be the net difference between the debit initially paid for the call option and the credit received at its sale.

An increase in volatility has a positive effect however, usually when implied volatility is increasing the share price of the stock is falling. Any share price fall will be a negative for the Call Option.

For a long call strategy, theta is negative. As each day passes to expiry, time value is eroding from the call option. Look at the option quote for Facebook:

You will see that the theta value is -0.033. This means that $0.033 per share or $3.30 total of time value will erode every day from the value of the $120 call up to the March 17th expiry. Therefore, because you own the call option contract you want the value of the option to increase not decrease. Theta is working against you.

Delta is the rate of change in the value of an option for a $1 move in the underlying share price. In our example with Facebook, you can see that the delta for the March 17th $120 call is 0.466. This means that as the share price of Facebook rises by $1, the value of the $120 call will rise by $0.466 per share or $46.60 total and vice versa.

The further in-the-money the call option is, the higher the delta will be until eventually you get a delta of 1. This is where the call option mirrors the stock movement exactly. If you are going to buy calls it is a good idea to choose calls with a delta of 0.70 or higher.

We can also consider delta as having 46.6 shares of Facebook. Think about it...if Facebook rose by $1 and we owned 46.6 shares we would make a profit of $46.60. The exact same as the long $120 call option position.

A couple of things to know about delta:

The strike prices that you pick will depend on how bullish you are on the stock.

You have no assignment risk with a long call strategy.

Should a stock go ex-dividend before expiry you may want to consider taking early assignment to receive the dividend for the stock. This will depend on the dividend amount.

Like any strategy, the long call has pros and cons. Compared to buying the stock outright, it offers lower risk and potentially much higher returns.

However, the long call also has drawbacks. Your breakeven price is higher (depending on the strike price you choose), making profitability less likely. Also, call options lose value over time (theta decay). If the stock price doesn't rise above your breakeven point before expiration, you could lose some or all of your investment. Finally, call options don't pay dividends, and you don't get voting rights.

At Share Navigator, we only use long calls for expirations longer than 12 months, giving the stock more time to rise. We prefer in-the-money strikes with a delta of at least 0.7, even though they cost more, as this improves the probability of profit.

The long call isn't a strategy we use often. We generally avoid paying for time premium. If we're bullish and implied volatility is low, we prefer the bull call spread (great for beginners). If we're bullish and implied volatility is high, we opt for credit strategies like the short put, put ratio spread, or bull put spread.

Time for you to apply your knowledge.

This may be your first introduction to the Option Greeks. At first, it may appear a little daunting but please trust us after a while it becomes second nature. Many people before you have gone through our training and now trade options daily and some for a living.

We will provide a brief introduction to each Greek below. During each strategy we will also outline the effect of Delta, Gamma & Theta as it relates to each strategy.

Theta: Theta is used to track the rate of decay of the time value of an option. It is a dollar amount which tells you at what dollar amount the value of the option will erode each trading day.

Time Value Reminder Example: The time value of an option is the variable piece of the option's value. Here's an example: Suppose you identify a stock that is currently trading for $21.35 per share, and you decide to buy the $20 strike price Call options.

Before buying the options, you note that the ask price for the $20 strike price Call for the current month's expiration is $2.50 per share. There are two components in the price of the option:

The intrinsic value of the option is simply the difference between the price of the stock ($21.35 per share) and the ITM strike price of the option ($20.00 per share).

If the ask price for the option is $2.50 per share, and we know that the intrinsic value of the option is $1.35 per share, then we can easily deduce the time value component of the option (take the ask price of $2.50 per share and subtract the intrinsic value of $1.35 per share). This gives us a time value component of $1.15 per share.

Now, suppose you consider the $20 strike price Call for the same stock, just one month further out in time. In that case the stock price hasn't changed, and it's still trading for $21.35 per share. The strike price is still the $20 strike price option, but now the ask price for the option is $3.50 per share. What's changed? The only difference in the price of the

option is the time value. Since the options for next month are further away from expiration, we should expect to pay more for them.

Theta is the rate at which the Time Value of an option decays on a daily basis. As the option approaches its expiration date, the time value erodes more rapidly. Tracking the Theta as an option approaches expiration reveals the speed of the decay of time value.

Example below: Compare the Theta for the $110 Calls for Apple for Jan 2018 and April 2016. You should notice that the Theta for the near-term options of -$0.2040 is much larger than the Theta for the longer-term options of -$0.0134.

As we take you through Option strategies you will see how we like to use our shorter term options when we are selling Option premium. Primarily because the Theta is decaying at a higher rate. We will discuss this as we go through each Option Strategy. Theta is a friend of option sellers. Because when you sell Covered Calls or Puts for example you want the value of the option to erode. That means you could actually buy back the option you sold cheaper (assuming implied volatility remains the same). As each day passes towards expiry Theta is eroding the value of the option.

If you are a buyer of options for example call options Theta works against you because you want the value of the option to rise. Theta causes the value of an option to erode as each day passes to expiry. So you are depending on the ITM (Intrinsic) Value to increase in order to make a profit. This will become apparent in the examples we give later in the long call strategy. For now all you need to know is that Theta works against you when you own options and works for you when you sell options.

Delta is the variable that tracks the relationship between the change in the price of an underlying stock and the change in the value of the option contracts associated with it.

Delta ranges in value from 0.00 on the low side, to a maximum of 1.00. An option with a Delta of 1.00 means that for every dollar the stock rises in price, the options will increase in value by one dollar per share. This becomes very important when you consider that most option contracts control 100 shares of stock. If the underlying stock rises $1.00 per share in value, the "Delta 1.00" contract just increased in value by $100.

Generally, an "at-the-money" option strike price will have a Delta around 0.50. For every dollar the stock rises, the at- the-money option will increase by 50 per share, or $50 per contract on a 100-share contract.

The deeper in the money an option becomes, the greater the Delta, until the Delta reaches 1.00. Delta will never exceed 1.00 for a single contract. Keep in mind, the higher the Delta, the more expensive the option contract. The reverse is also true - the lower the Delta, the less expensive the option.

Delta for Call options will always have a positive value between 0 and 1. For example, see options quote below:

You can see for the Call options on MSFT that the Delta for the April 15th $40 strike price is 0.7227. You also notice that the bid/ask for the Call Options is $5.40/$5.75.

What does this mean?

Delta for Put options will always have a negative value between 0 and -1. For example, see options quote below:

You can see for the Put options on Apple that the Delta for the May 27th $112 strike price is -0.5004. You also notice that the bid/ask for the Put Options is $4.35/$4.25.

What does this mean?

Delta can also be used as a rough estimate of the probability of an Option finishing In the Money (ITM). For example, an option with a Delta of 0.70 has a 70% chance of finishing ITM or having real value at expiry. An Option with a Delta of 0.25 has a 25% chance of finishing ITM. When you get to advanced trading strategies probabilities will become crucially important.

Portfolio Delta is the overall Delta position on your entire portfolio of stocks and options. Each position you have in your portfolio will have a Delta Value – positive or negative. The combined Delta Value of all of your positions is your Portfolio Delta. Portfolio Delta tells you whether or not your overall portfolio has a Bullish or Bearish bias. Portfolio Delta for options we trade is linked to the S&P 500 index. For example, if we had an overall Portfolio Delta of +50, it means for a 1% rise in the S&P 500 …. The value of our portfolio will go up by $50. And Vice Versa. If we had a portfolio Delta of -50, that means for a 1% fall in the S&P 500 our portfolio will go up by $50. And vice versa.

Another way of looking at Portfolio Delta is the share equivalency of SPY, the ETF that tracks the S&P 500. If you have +50 Portfolio Deltas it is the equivalent of owning 50 shares of SPY. If you had -50 Portfolio Deltas it is the equivalent of being short 50 shares of SPY. Portfolio Delta will become critically important to helping you manage risk in your portfolio. Option Traders look at Delta constantly to rebalance risk in their portfolios.

Delta is not a static figure it moves as share prices move. This is where we introduce you to Gamma. Look at the Option Quote below.

Gamma is the rate of change of Delta for a $1 move in the share price of the underlying stock. The above quote is for Apple. Take the $112 Call as an example. You can see that

It has a Delta of 0.4881 and a Gamma of .0417. If the share price of Apple falls by $1 the Delta value will fall to 0.4464 (Delta – Gamma). On the flip side, if the stock price rises by $1. The Delta will rise to 0.5298 (Delta + Gamma). This will become important for you later when you are assessing the viability of numerous option strategies.

As an option contract gets closer to expiry it usually results in higher Gamma. This creates additional risk in a portfolio with options that are at-the- Money in particular, prices of options can move more aggressively and thus creates greater risk. This is why you will hear us constantly saying take 50% of Max Profit (for most of our trades), this means that we are closing profitable trades early and not letting Gamma risk come into the equation. Example of higher Gamma Closer to Expiry. See chart below for different expiries for the $112 Call.

Notice how Gamma for April 15th is 0.2489 while Gamma for May 13th is only .0470. This has a big impact on option pricing.

Delta and Gamma are two very important Option Greeks. For each Option strategy that we teach we will also discuss the effect of Gamma and Theta. If you are totally new to this, it may appear daunting but please believe us…..this will become second nature to you with a little practice…we have many clients to prove it who are actively trading options!

Remember to ask us lots of questions during our weekly support web meeting.

At this stage it is important for you to get some practical experience in buy call options. so here is what you need to do:

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