A long call gives you the right to buy the underlying stock at strike price A.

Calls may be used as an alternative to buying stock outright. You can profit if the stock rises, without taking on all of the downside risk that would result from owning the stock. It is also possible to gain leverage over a greater number of shares than you could afford to buy outright because calls are always less expensive than the stock itself.

But be careful, especially with short-term out-of-the-money calls. If you buy too many option contracts, you are actually increasing your risk. Options may expire worthless and you can lose your entire investment, whereas if you own the stock it may be worth something.

Maximum Potential Profit

There’s a theoretically unlimited profit potential, if the stock goes to infinity. (We’ve never seen a stock go to infinity. Sorry.)

Maximum Potential Loss

Risk is limited to the premium paid for the call option.

Break-even at Expiration

Strike A plus the cost of the call.

Ally Invest Margin Requirements

After the trade is paid for, no additional margin is required.

Time Decay

For this strategy, time decay is the enemy. It will negatively affect the value of the option you bought.

Implied Volatility

After the strategy is established, you want implied volatility to increase. It will increase the value of the option you bought, and also reflects an increased possibility of a price swing without regard for direction (but you’ll hope the direction is up).

Final Thought

Don’t go overboard with the leverage you can get when buying calls. A general rule of thumb is this: If you’re used to buying 100 shares of stock per trade, buy one option contract (1 contract = 100 shares). If you’re comfortable buying 200 shares, buy two option contracts, and so on.If you do purchase a call, you may wish to consider buying the contract in-the-money, since it’s likely to have a larger delta (that is, changes in the option’s value will correspond more closely with any change in the stock price). Try looking for a delta of 0.80 or greater if possible. In-the-money options are more expensive because they have intrinsic value, but you get what you pay for.

Learn More About Ally Invest