How to Get the Most Out of Your Long Call Option

There are two types of options traders: those who master long calls and those who wish they had.

Buying call options might seem as simple as making a directional bet on a stock's rise.

But the difference between profitable and lackluster returns often lies in the subtle details - timing, strike price selection, and a deep understanding of how volatility shapes your position's value.

Consider it the difference between playing chopsticks and a Beethoven sonata on the piano - the keys are the same, but the mastery is in how you play them.

Many traders jump into long calls attracted by the tantalizing profit potential, only to watch their premiums decay away like ice on a hot summer day.

But those who take the time to truly understand the mechanics of call options - from the Greeks that govern their behavior to the strategic timing of entry and exit points - find themselves with a powerful tool that can enhance their trading arsenal.

Today, we're going to help you learn:

• Why some traders consistently profit while others watch their options expire worthless
• The secret to selecting strikes that match your trading style and risk tolerance
• How to stop time decay from eating away your profits
• The professional's playbook for timing entries with implied volatility

It's time to transform your call options from lottery tickets into precision instruments.

Strike Price Selection

Every options trader starts with the same question: should I buy in-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM) calls? The answer lies in understanding how each choice affects your risk, reward, and probability of profit.

But before we get to that, we need to cover two key terms: intrinsic and extrinsic value.

Intrinsic value is the value of an option at expiration. Only ITM options have intrinsic value.

To give you an example, let's assume a stock trades at $100, and we own a call option for the $90 strike. That option cost us $15.

If we exercised the option right now, we could buy 100 shares of stock at $90 and immediately turn around and sell them to the market at $100, making $10 per share. That $10 per share is the intrinsic value. The remaining $5 is the extrinsic value. At expiration, all extrinsic value disappears from an option.

So, let's see how this applies to the three different types of call options we can buy.

In-The-Money (ITM) Calls

Think of ITM calls as buying with a head start. These options cost more because they already have intrinsic value, but they're more forgiving if your timing isn't perfect.

ITM call options have a strike price below the stock's current price. These options move more closely with the stock price, making them ideal when you:

• Have strong conviction in your trade
• Want more predictable price movement
• Are willing to pay more for higher probability of profit
• Need to limit theta decay's impact (extrinsic value)

The further ITM you go (lower strike price), the more the option's price moves like owning 100 shares of stock. However, the further ITM you go, the more expensive the option gets. And the more expensive the option gets, the greater your potential loss.

At-The-Money (ATM) Calls

ATM calls offer the sweet spot between cost and opportunity. These options are when the strike price equals the stock's current price. Traders generally go with ATM when:

• Looking for optimal risk/reward balance
• Want significant leverage without excessive cost
• Need strong correlation to stock movement without overpaying
• Are confident in direction but want some room for error

ATM options have no intrinsic value. So, you need the stock to move upward or implied volatility to increase in order to turn a profit.

Out-of-The-Money (OTM) Calls

When you see those options prices that jump 1,000%, you're probably looking at OTM call options.

The siren song of OTM calls lies in their low cost and high potential returns. However, they require significant stock movement just to maintain value. These are your highest risk, highest potential reward plays, best suited when:

• You expect a sharp, quick move up
• Are willing to risk 100% of premium
• Have identified a catalyst that could drive rapid price appreciation
• Want to limit total capital at risk

The option chain below helps illustrate our choices:

The ATM strike price is $138.00.

ITM call options with strike prices below $138.00 are highlighted in green. OTM call options with strike prices above $138.00 are not highlighted.

In this example, the stock rose 2.0% on the day, so all the call options increased in value. However, the ITM options saw greater total and percentage gains than the OTM options. But OTM options are significantly cheaper.

In fact, you could buy three $142 calls for the price of one $138 call and see the same total gains.

Now, all of this looks at options with the same expiration date.

But let's see how different expiration dates impact the prices.

Choosing the Right Expiration

Below is the option chain for the same stock on the same day, but for the expiration cycle that's 25 days in the future.

However, the options that expire in 25 days also cost a LOT more.

To keep things simple, we'll summarize this in just a few lines:

• Options that expire further down the road:
• Cost more
• Are less sensitive to changes in the underlying price
• Don't see extrinsic value decay as quickly
• Options that expire sooner
• Cost less
• Are more sensitive to changes in the underlying price
• See extrinsic value decay rapidly

Pro Tips

One of the most common mistakes traders make is choosing cheaper options, either because they don't want to spend as much, or because they want to see higher percentage returns. Don't fall for this trap.

Use the points above to help guide your decision as to whether you choose ITM, ATM, or OTM options.

As for strike selection, err on giving yourself more time rather than less. Yes, the percentage gains will be smaller when you get the move you want. But, if you the move you're looking for comes too late, then you can get the direction right and still lose money.

Try using the rule of three. If you expect the trade setup to take one week, go for an expiration at least three weeks into the future.

Now that we've covered strike and expiration selection let's jump into implied volatility or IV.

Option Implied Volatility

Implied Volatility, or IV for short, is the demand for an option. The higher the demand, the higher the option price.

Seems easy enough, right?

When traders start learning options, most ignore IV to their detriment.

You see, IV is essentially the only reason an option has extrinsic value. Because if there wasn't demand, there wouldn't be a premium for the option.

Now, here's the cool part.

Implied volatility is mean reverting. The further it moves from the historical average demand, the more likely it is to snap back.

And it doesn't matter whether you're talking about an index or a stock. It all works the same way.

If that's true, we want to buy when implied volatility is low and sell when it's high.

But how do we even know what's high or low?

The easiest way to measure implied volatility is using IV Rank or IV Percentile, both of which look at implied volatility out thirty days.

IV Rank gives you a number on a scale from 1-100 that tells you where the current IV percentage is in range of IV for the past year. So, if IV went from 20%-40% over the past year and currently sits at 30%, then the IV Rank is 50.

IV Percentile looks at the IV compared to the IV for every day over the past year. So, if 75% of the days in the past year had an IV below the current IV, then the IV Percentile would be 75%.

We can easily look up these metrics in the Price Overview for the stock, and then scroll down to Options Overview:

In this case, we're looking at Amazon, which has a low IV Rank and medium IV Percentile.

So, if we're going to buy call options, we want something with similar IV to the expirations that are roughly 30 days out.

Fortunately, there is a very easy way to see where and how that happens.

Under our Options section, we can pull up the Volatility Charts which gives us the following graph:

Based on this graph, we can see that the IV we want to work with is between November 29 and January 17. After that, IV increases as we get into the next earnings cycle.

Now, you'll also notice that the IV for the near-term expirations is rather high. That's typical for most stocks most of the time. It's also why you need to be far more careful with short-dated options.

So, let's do a quick trade example and see how this all ties together.

We start with the general premise that we expect Amazon's stock to increase through the end of this year both as Christmas boosts profits and general seasonality favors the upside.

Therefore, we want to look at an option that expires in January.

Pulling up our option chain, we get the following data:

Amazon's stock is the highest it has ever been, right here at $200. So, it may take some time to break through this key level.

But once it does, we can expect it to start moving swiftly.

So, any call option between $205-$215 fits us perfectly. All you have to do is figure out how much you're willing to risk and let that guide your decision.

Bringing it All Together

Success with long call options isn't about hitting home runs - it's about making consistent, well-planned trades. By following the framework we've covered, you're now equipped to:

• Select the right strike price based on your trading goals and risk tolerance
• Choose appropriate expiration dates using the rule of three
• Time your entries with implied volatility analysis
• Avoid the common pitfall of choosing cheaper options just to save money

Remember, every professional options trader started exactly where you are. The difference between success and failure often comes down to patience and discipline. Take the time to analyze each trade using the tools we've discussed, and don't be afraid to pass on opportunities that don't meet all your criteria.

Start small, focus on mastering these concepts with paper trading, and gradually scale up as your confidence and success rate grow. With practice, you'll find yourself among those who have mastered long calls, rather than those who wish they had.