For those who are very bullish on a particular stock over the near- or long-term, and who require a known, limited downside risk, buying a call might be an appropriate strategy to use. Purchasing a call option usually requires a smaller initial cash investment than an outright stock purchase, which in addition to reducing the capital at risk offers the potential of leveraged profits if a bullish opinion proves correct. As the underlying stock continues to increase, the long call's profit potential is theoretically unlimited, and larger returns on investment can be seen in comparison to an outright stock purchase. On the downside, the stock investor is exposed to a potentially significant dollar loss from a decline in share value, while the call buyer's maximum loss is known in advance and is limited entirely to the option's purchase price.
Today's investor has a choice of shorter-term expiration months afforded by regular equity option contracts, longer-term expirations available with LEAPS®, as well as multiple strike prices. So no matter an investor's anticipated target price for an underlying stock after a bullish move, or the time frame over which this move might occur, there is most likely a call contract that fits both his outlook and tolerance for risk.
Buy Call Strategy Worksheet
Download the "Who Should Consider Buying Calls?" Worksheet