Differentiating Call vs. Long Call Options Strategies

What you need to know about each type of call

Digital Content Manager
Aug 6, 2020 at 3:08 PM
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    As retail traders flood the market a return to the basics may help novice traders understand the fundamentals of options trading, we're going to run a weekly post about options education. First up is the difference between call and long call options.

    Though their names may sound similar, call and long call options are inherently different. A call option is a contract that gives investors the right -- but not the obligation -- to buy a stock at a certain strike price, allowing them to profit from an asset that rises in value by buying it a lower strike price. Meanwhile, long call options traders are actually buying shares of a certain stock, with the belief that they will rise beyond a certain strike price before a pre-determined expiration date. One of the main differences, therefore, is that long calls can instantly give you equity, while calls give you the ability to buy shares at a discount.

    There are advantages and disadvantages to each one of these. For one, the potential for profit on long calls is astronomical, as there are technically no limits to how high a stock could go. In addition, long call investors get paid dividends, since they are also shareholders. As for call traders, they could get a bargain on a booming stock, and their risk is limited since the cost of contract is the most they could ever lose, should it not live up to expectations.

    That being said, call buyers may not necessarily see as much of a profit, and will not get paid dividends as they do not have equity in a company until they choose to buy shares. Conversely, long call traders could lose money they invested into a certain stock, if shares do not move higher than the strike price before the pre-determined expiration date. In other words, call holders won't benefit from dividend payments the same way a shareholder would.

    These distinctions are important when deciding how to invest in an equity. Next week, we'll dive into how investors can use pairs trades to take advantage of a given sector.

    Editor's Note: In an earlier version we referred to the two types of call options as "strategies." This has been revised and we apologize for the confusion.



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