4.1.1.1. Long Call
Suppose LeanTree stock is currently trading at $25. You believe LeanTree stock is about to skyrocket and, hence, you would like to buy a call option on it. Remember, a call option gives the buyer the right to buy at a set price. A call option may look like this:
LNTR Jul 25 call @ 3
LNTR is LeanTree’s ticker symbol. July is the month the option will expire. The 25 refers to the strike price and “@ 3” means that the price of the option is $3.00 per share.
The $3 price of acquiring this option is the premium. You pay $300 in total for the call option because an options contract always consists of 100 shares. You are now long a call option, meaning that you own a call option.
The price at which you have agreed to buy the security in the future is called the strike price, or exercise price. Whatever LeanTree stock might do over the next three months, whether it goes up or down, the price you have agreed to pay if you exercise your right to buy is fixed at $25. The expiration date is the last day you can buy at that fixed price. The expiration day is always the third Friday of the month.
Take a look at the following diagram. If the price of the underlying stock (LeanTree) stays at $25 or declines in value, you will not exercise your right to purchase the stock. You will let the option expire, worthless, and you will lose the $3 premium you paid for each of your 100 shares ($300). Why? Because you have bought the right to pay $25 for the stock regardless of the market price of the stock. If you were to exercise the call at $25 and acquire a security worth $23, you would be paying more than the stock is worth.
Suppose, however, the price of LeanTree rises to $28. You exercise the call and buy a security for $25 that has a market value of $28. What