Purchasing a Call
Also known as Long Call
Last updated
Also known as Long Call
Last updated
A long call option is a bullish strategy where an investor buys a call option, typically when they believe the price of the underlying asset will rise significantly before the option expires. The buyer of the call option pays a premium to the seller and can profit if the asset price increases beyond the strike price plus the premium paid.
The long call option strategy allows investors to potentially earn profits if the price of the underlying asset rises. However, it involves the risk of losing the premium paid if the asset price does not increase beyond the breakeven point before the option expires.
Let's say it's January 1st, 2023, and $ETH is trading at $3,000 per token. An investor believes that the price of $ETH will increase in the next few months and decides to buy a call option with a strike price of $3,200, expiring on June 1st, 2023. The investor pays a premium of $200 for the option.
If the price of $ETH significantly increases to $3,500, the investor's profit on buying the token at $3,200 would be $300 ($3,500 - $3,200). Since the investor paid a $200 premium, you would subtract the premium, and the net profit is $100 ($300 profit - $200 premium).
The break-even point is the price at which the investor neither gains a profit nor incurs a loss. In this example, the break-even point is the strike price plus the premium paid, which is $3,400 ($3,200 + $200).
If the price of $ETH slightly increases to $3,300, the investor can exercise the call option and buy $ETH at $3,200, even though it’s currently trading at $3,300. In this case, the investor earns a profit of $100 per token ($3,300 - $3,200) but has a net loss of $100 ($100 profit - $200 premium).
However, if the price of $ETH decreases to $3,100, the call option will expire worthless since the price is below the strike price of $3,200. The investor loses the $200 premium paid for the option.
