For aggressive investors who are bullish about a stock/index’s prospects, buying calls can be an excellent way to capture the upside potential with limited downside risk.
Buying a call is the most basic of all options strategies. It constitutes the first options trade for someone familiar with buying/selling stocks and would now want to trade options. Buying a call is easy to understand—if you buy a call, it means you are bullish—you expect the underlying stock/index to rise in the future.
When to use: Investor is very bullish on the stock/index.
Risk: Limited to the premium (Maximum loss if market expires at or below the option strike price).
Breakeven: Strike Price+Premium
Example: Mr. XYZ is bullish on Nifty on June 24, when the Nifty is at 4191.10. He buys a call option with a strike price of Rs. 4600 at a premium of Rs. 36.35, expiring on July 31. If the Nifty goes above 4636.35, Mr. XYZ will make a net profit (after deducting the premium) on exercising the option. In case the Nifty stays at or falls below 4600, he can forego the option (it will expire worthless) with a maximum loss of the premium.
Analysis: This strategy limits the downside risk to the extent of premium paid by Mr. XYZ (Rs.36.35). But the potential return is unlimited in case Nifty rises. A long call option is the simplest way to benefit if you believe that the market will make an upward move and is the most common choice among first time investors in Options. As the stock price/index rises the long Call moves into profit more and more quickly.