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There are many options trading strategies available to the options trader to profit from while at the same time trying to limit risk. The options trading strategy that is most used by trader and investors alike is the long call strategy.

In the long call strategy you are buying the right to to the underlying shares of the stock (or futures contract if trading futures) at a certain price until the expiration date is upon you. You would use this strategy if you felt that the price of the stock was going to go up. If you expect an increase in price and would like to participate then it would be better to employ the use of options as opposed to buying the stock. A long call strategy still gives you the unlimited upside of the stock but it protects you downside risk.

When you own a call you make money when the stock increases in price. When stock goes up your call goes up. When the stock goes down you call will go down but it can only go down to zero. You can only lose the amount that you invested into the trade. However, there is no cap on the upside potential profit.

Let’s look at why employing an option trading strategy with long calls is a smart trading strategy. Let’s say that you had an interest in owning XYZ which was currently trading at $74. You would like to own 200 shares of the company.
However, a 200 share purchase would cost you $14,800 plus commissions to buy the stock. Now if you bought the stock and laid out nearly $15,000 in cash then would make money if the stock went up and you would lose money if the stock went down. And you would make or lose equally in each direction. If you stock went up $10 then you would make $2000 dollars. Conversely, if the stock fell $10 you would lose $2000. The same would not be true of a call option.

Let’s take a look at what would happen if you purchased a 75 strike price call for the same stock. If you expected the stock price to occur in short order then you might purchase the following month’s expiration date. Depending on the volatility of the stock you might pay a wide range in options premium but let’s say for the sake of our example you pay $3.50 for the call strike. You would be buying a call that is currently $1 out-of-the-money ($74 share price and $75 strike price) and paying a total of $700 (plus commissions) to leverage 200 shares of XYZ. As you can see, the amount of money that you have had to lay out is much lower than what it would have taken to purchase the stock itself ($700 vs $14,800). This is already a big plus. You will sleep a little better knowing that you don’t have as much money on the line.

Now let’s look at what would happen if the stock increased in price and if the stock decreased in price. We will assume that you held the stock till expiration and that you lose all of the premium that you paid for the stock.
If the stock increase in value to $85 then at expiration you would have a total profit of $1300. Your breakeven price would be $78.50 ($75 strike plus $3.50 in option premium). Therefore, when the stock closed at $85 on expiration day you would have $6.50 per option in profit. Since you would have had two option contracts that would give you a profit of $1300. If the stock had increased to $95 then you would have a profit of $3300. Not bad for an options investment of $700.

But what would have happened if the stock decreased in value. If you had owned the shares of stock and the stock decreased by $10 or $20 then you would have lost $2000 or $4000. However, if you had employed the option trading strategy of long calls then you would only have lost the $700 that you had invested. In fact, if the stock went to $0, the most that you could lose would be $700.

You have unlimited upside profit potential but limited downside risk for only a fraction of the overall cost.

Hopefully, this will point out to you the power of options trading strategies.