4.1.1. Long Call
Suppose corn futures are currently selling at 324. You believe the futures price is about to rise significantly and would like to buy a call option on the corn contract. Because a call option profits when the commodity’s price rises, it is considered a bullish strategy. A call option may look like this:
Long Sep Corn 324 Call @ 15
September is the month that the option will expire. The 324 refers to a $3.24 strike price and “@ 15” means that the price of the option is $0.15 per bushel.
The $0.15 price of acquiring this option is called the premium. Because the contract size of corn futures and options contracts is 5,000 bushels, you pay $750 in total for the call ($0.15 x 5,000 bu.). You are now long a call option, meaning that you own the call option.
The price at which you have agreed to buy the option is called the strike price, or the exercise price. Whatever corn 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 $3.24 per bushel. The expiration date is the last day you can buy at that fixed price. The expiration date is always the third Friday of the month.
Take a look at the diagram below. If the price of the underlying commodity (corn) stays at $3.24 or declines in value, you will not exercise your right to purchase the futures contract. You will let the option expire worthless, and you will lose the $750 premium you paid. Why? Because you have bought the right to pay $3.24 for the contract regardless of the market price of corn. If you were to exercise the call at $3.24 and acquire a futures contract worth only $3.20, you would be paying more than the contract is worth.
Suppose the price rises to $3.39. You exercise the call and buy a corn futures contract for $3.24 that has a market value of $3.39. What is your profit? Zero. The $0.15 you make on the purchase exactly offsets the $0.15 premium you paid for the ri