STRATEGY 1 : LONG CALL
For aggressive investors who are very bullish
about the prospects for a stock / index, buying
calls can be an excellent way to capture the
upside potential with limited downside risk.
Buying a call is the most basic of all options
strategies. It constitutes the first options trade for someone already familiar
with buying / selling stocks and would now want to trade options. Buying a call
is an easy strategy to understand. When you buy it means you are bullish.
Buying a Call means you are very bullish and expect the underlying stock /
index to rise in future.
When to Use: Investor is very bullish on the stock / index.
Risk: Limited
to the Premium. (Maximum loss if market expires at or below the option
strike price).
Reward: Unlimited
Breakeven: Strike Price
+ Premium
Example
Mr. XYZ is
bullish on Nifty on 24th June, when the Nifty is at 4191.10. He buys a
call option with a strike price of Rs. 4600 at a premium of Rs. 36.35, expiring
on 31st July. If the Nifty goes above 4636.35, Mr. XYZ
will make a net profit (after deducting the premium) on exercising the option.
In case the Nifty stays at or falls below 4600, he can forego the option (it
will expire worthless) with a maximum loss of the premium.
Strategy
: Buy Call Option
Current Nifty index
|
4191.10
|
|
Call Option
|
Strike Price (Rs.)
|
4600
|
Mr. XYZ Pays
|
Premium (Rs.)
|
36.35
|
Break Even Point
|
4636.35
|
|
(Rs.) (Strike Price
|
||
+ Premium)
|
||
The payoff schedule
|
The payoff chart (Long Call)
|
|||||
On expiry Nifty
|
Net Payoff from Call
|
|||||
closes at
|
Option (Rs.)
|
|||||
4100.00
|
-36.35
|
|||||
4300.00
|
-36.35
|
|||||
4500.00
|
-36.35
|
|||||
4636.35
|
0
|
|||||
4700.00
|
63.65
|
|||||
4900.00
|
263.65
|
|||||
5100.00
|
463.65
|
|||||
5300.00
|
663.65
|
|||||
ANALYSIS: This strategy limits the downside risk to the
extent of premium paid by Mr. XYZ (Rs. 36.35). But the potential return
is unlimited in case of rise in Nifty. A long call option is the simplest way
to benefit if you believe that the market will make an upward move and is the
most common choice among first time investors in Options. As the stock price /
index rises the long Call moves into profit more and more quickly.
