Long Call Options Explained

Questions and Answers

What is the primary advantage of holding a long call option?

Fixed profit that exceeds the premium paid

Obligation to exercise the option before expiration

Unlimited profit potential with limited risk (correct)

Guaranteed profit regardless of stock price movement

What happens to a long call option if the stock price remains below the strike price at expiration?

The holder receives a refund of the premium paid

The option becomes worthless, and the holder loses the premium (correct)

The option can be exercised for profit

The option is automatically converted to a short call

What is the main risk associated with a short call option?

Unlimited potential losses if the asset price increases significantly (correct)

Obligation to buy the underlying asset at the strike price

Loss of the premium received from selling the option

Potential for a margin call if the market rises

What is the maximum profit that a writer of a short call option can achieve?

The premium paid by the buyer for the option Signup and view all the answers

In what scenario would a long call option holder realize a profit?

When the stock price rises significantly above the strike price Signup and view all the answers

What is the maximum potential profit for the holder of a long put option?

The difference between the strike price and zero, minus the premium paid Signup and view all the answers

Which statement correctly describes the obligations of the seller of a short put option?

The seller is obliged to buy the underlying asset at the strike price if the option is exercised. Signup and view all the answers

What occurs if the stock price remains above the strike price at expiration for a long put option holder?

The option becomes worthless, and the holder loses the premium paid. Signup and view all the answers

What is the maximum loss for the writer of a short put option?

The strike price minus the premium received Signup and view all the answers

How does the risk profile of a long put option compare to that of a short put option?

Long put options have limited risk while short put options have substantial but limited risk. Signup and view all the answers

Study Notes

Long Call Option

Defined as the purchase of a call option contract.
Grants the right, but not the obligation, to buy the underlying asset at the strike price on or before the expiration date.
Requires upfront payment of the premium with no further obligations.
Profit potential is theoretically unlimited as stock prices can rise indefinitely.
Maximum loss is limited to the premium paid, even if the underlying asset’s price drops to zero.
If stock price exceeds the strike price, profitability increases; if not, the option expires worthless.

Short Call Option

Involves selling (writing) a call option contract.
The seller does not hold any rights associated with the option.
Obligation to sell the underlying asset at the strike price if exercised by the buyer.
Profit potential is limited to the premium received from selling the option.
Risk is theoretically unlimited; if the stock price rises significantly, losses may escalate as the seller may need to buy the asset at a higher market price.
Retaining premium as profit occurs if stock price remains below the strike price at expiration.

Long Put Option

Involves purchasing a put option contract.
Grants the right, but not the obligation, to sell the underlying asset at the strike price on or before the expiration date.
Requires payment of the premium with no further obligations.
Profit potential is substantial but capped at the difference between the strike price and zero, minus the premium.
Maximum loss is limited to the premium paid, regardless of how high the underlying asset’s price rises.
Profit can occur if stock price falls significantly below the strike price; otherwise, the option expires worthless.

Short Put Option

Refers to selling (writing) a put option contract.
The seller has no rights and is obligated to buy the underlying asset at the strike price if the option is exercised.
Profit potential is limited to the premium received from selling the option.
Risk is significant but capped, as the asset’s price cannot drop below zero.
Maximum loss occurs when the asset’s price falls to zero, requiring the writer to purchase it at the strike price.
Profit is retained if the stock price remains above the strike price at expiration.

Summary of Differences

Long Call: Right to buy, unlimited profit potential, risk limited to premium paid.
Short Call: Obligation to sell, limited profit potential, unlimited risk.
Long Put: Right to sell, significant but limited profit potential, risk limited to premium paid.
Short Put: Obligation to buy, limited profit potential, substantial but limited risk.
Understanding these distinctions is essential for informed trading and investment strategies, aligning actions with individual risk tolerance and market perspectives.

Description

This quiz dives into the intricacies of long call options, covering their definition, rights, obligations, and profit potential. Test your understanding of this fundamental option trading strategy and enhance your investment knowledge.