Long Call Option: When To Create It, and Key Things to Remember

The entry-level strategy for many traders is the long call strategy. Stories of how a friend, or someone they know, turned a small call option trade into a big profit are what often draw cash market traders into the world of options. The idea of winning big through option buying is what attracts retail participants more than the stock market itself. 

Before diving into how to trade a call option effectively, let’s revisit the foundational concept. 

What is a call option? 

A call option gives its buyer the right, but not the obligation, to go long on an underlying asset at a predetermined price, known as the strike price, on or before a set expiration date. If the underlying asset’s price goes up, the value of the call increases. If the price falls, the call’s value decreases. 

To acquire this right, the option buyer pays a premium to the seller of the call. The buyer can exit the trade anytime—either by selling the option or letting it expire. 

We’ve already covered the basics earlier. Here, we focus on the key components a buyer must consider before entering a trade: 

• Strike Price – The agreed price at which the asset can be purchased 

• Expiration Date – The deadline by which the trade settles or expires 

• Premium Paid – The cost paid to acquire the right to buy 

Payoff Diagram of a Call Option 

Nifty is trading at 17,825 and a Long Call position is taken by buying the 18,000 strike Call option for the 25th August 2022 expiry. 

Since the strike price is above the current market level, the 18,000 Call is considered an Out-of-the-Money (OTM) option. 
The premium paid to take this position is ₹90, which results in a total outlay of ₹4,500 (assuming 50 units in the lot). 
This ₹4,500 is the maximum potential loss. 

The trade breaks even only when the market price crosses the strike price plus the premium paid: 
Breakeven = 18,000 + 90 = 18,090 

When to create a Long Call position 

A Long Call strategy is best deployed when the trader expects the underlying asset to rise sharply. 

There’s a common belief that option sellers earn more consistently than buyers. That’s partly true sellers benefit even when markets remain flat or don’t move enough, due to time decay. 

This makes Long Call trades viable only under specific conditions: 

• When the trader expects a strong and quick price move 

• When used for short-term trades like intraday or BTST 

• When the exposure time is limited, reducing the impact of time decay 

• When volatility is low (professional traders often track IVR or IVP for this) 

This strategy is most favored by scalpers and momentum traders who aim for fast, directional gains. 

Which Call Option to buy 

A Long Call strategy can be built using any available strike, but the choice matters. 

Retail traders often go for Deep OTM options because they appear cheap. But for such a trade to work, the market must make a big and quick move which doesn’t happen often. 

Unless you're anticipating a major surprise move, it's better to go for: 

• At-the-Money (ATM) 

• Slightly In-the-Money (ITM) 

• Slightly Out-of-the-Money (OTM) 

This increases your probability of success. 

Factors to consider in selecting the Call option strike price 

Impact of underlying price change 

The value of a Call option doesn’t mirror the exact price change of the underlying asset. This is governed by the Option Greek called Delta. 

Example: If a Call option has a Delta of 0.20, a 100-point move in the underlying results in a 20-point change in the Call option. 
Traders should pick a strike that matches the expected market move and offers the best risk-reward outcome. 

Impact of volatility 

Volatility is the ally of the option buyer. A rise in volatility increases option premiums. 

Professional traders often look to enter Long Call positions when volatility is low and likely to increase. 
(However, it’s not always correct to say a Long Call should only be created when volatility is at its lowest for the year.) 

Impact of time 

Time decay works against the option buyer. The longer the market takes to move in your favor, the more the premium loses value. 
A Long Call works best when the trader expects a sharp move in a short timeframe. Even a correct directional view may lead to losses if the breakeven point isn’t crossed in time. 

Impact of stock price change 

Call prices don’t move rupee-for-rupee with the underlying. Instead, the change is determined by Delta. 

• ATM Calls have a Delta of around 0.50. So a ₹10 rise in stock price causes a ₹5 rise in the call price. 

• ITM Calls have a Delta higher than 0.50 (but less than 1) 

• OTM Calls have a Delta lower than 0.50 (but greater than 0) 

Impact of change in volatility 

Volatility refers to how much the stock price fluctuates. When volatility rises, all else remaining constant, option premiums increase. 
Long Calls benefit from rising volatility and lose value with falling volatility. 

Impact of time 

As the expiry date gets closer, the time value of an option declines a phenomenon known as time erosion. 
This negatively affects Long Call positions if there isn’t a quick and substantial price move. 

Things to remember 

• A Call option gives the buyer the right, but not the obligation, to buy the underlying at a specific price before expiry. 

• A Long Call is best created when a bullish outlook exists and is expected to play out quickly. 

• Volatility is an asset for option buyers; time decay is the risk.