One thing that annoys me a bit is when option traders refuse to consider buying a call or put, no matter what. Granted, I only use long calls and puts in certain situations, but I will still buy them. Here is a brief reminder to all option traders who have abandoned buying calls: Please don’t forget to consider them as an option, so to speak.
Got Me Started
The first thing I learned as a brand-new option trader was a long call. I viewed it as a great strategy when I expected to profit from a move higher in the stock for significantly less money than buying shares. However, once an option trader has a firm grasp on spreads, like verticals, long calls and puts are a thing of the past. Let’s not forget that a long call and puts to some degree have unlimited profit potential, and there is always a chance the stock might rise or fall more than you envisioned. There is no better risk/reward in options than a long call or put.
Take a look at a recent daily chart of McDonalds Corp. (MCD). After breaking out of a downward sloping channel, the stock moved from around $270 to over $282 in about 2 weeks. That is a rise of almost 4.5% over that period.
Certainly, a bull put spread would have profited with the move higher, and a bull call spread would have done even better from a risk/reward perspective. But an at-the-money (ATM) or even an out-of-the-money (OTM) long call most likely would have produced the best monetary return.
A long call with positive delta and positive gamma would have been a great way to profit from this extended move higher. In addition, a long call has positive vega, which could have increased the call’s premium if implied volatility also increased. IV level are currently on the lower side too. Of course, if IV decreased, vega would have decreased the premium.
Please do not forget about long calls and puts. They are extremely viable options. The bottom line is, when expecting a move higher or lower buying a call or put should always be considered. It might just produce a grand slam trade too.
Senior Options Instructor