Rick Orford
6 min read
In This Article:
Long calls are perfect for betting on an asset’s future upside price movement, though I would argue that time is the better asset when it comes to buying options contracts. Without enough time untill expiration, even a massive upward price movement will only generate intrinsic value - if the option is in-the-money.
As a result, calls with longer time horizons tend to perform better than those that are shorter dated.
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Calls are contracts that give the buyer the right but not the obligation to buy a specified asset at a specific strike price at or before the expiration date. But if you boil it down to its very basics, at least in terms of how most trades make money off of them, a long call is a leveraged bet on the stock moving up before your expiration date.
Since option contracts are time-bound, a portion of their value is derived from the remaining days to expiration, also known as DTE. This concept is commonly referred to as the time value.
The time value decreases as the expiration date approaches, and it decreases faster as the option gets closer to expiration - a phenomenon known as time decay. That’s great news for option sellers, but not much for option buyers. Having more time on the clock means your bet has more time to work in your favor. That extra breathing room can make all the difference between a winning trade and a frustrating loss.
Delta is the options Greek that indicates the relationship between the option’s value or premium and the asset’s price, or, more exactly, how much an option’s premium is expected to change for every $1 move in the price of the underlying asset.
Long calls have positive delta. Therefore, if a long call has a 0.20 delta, the premium is expected to increase by 20 cents for every $1 increase in the underlying asset.
More interestingly, delta is often used as a shorthand predictor of the probability of the option expiring in the money. The same 0.20 delta option has a 20% chance of expiring in the money. While it’s not a 100% accurate predictor, delta is based on factors that include how close the option is to the current stock price, which makes it a good indicator of risk.
