---
title: "Call is not just a game for the brave - 4 typical application scenarios"
description: "This is the second article in the options series: Introduction to Call Options, striving to be the best beginner-friendly guide to call options. If you're new to options, we recommend reading the firs"
type: "topic"
locale: "en"
url: "https://longbridge.com/en/topics/20292589.md"
published_at: "2024-04-01T05:16:21.000Z"
author: "[震哥的投资世界](https://longbridge.com/en/profiles/9822057)"
---

# Call is not just a game for the brave - 4 typical application scenarios

This is the second article in the options series: Introduction to Call Options, **aiming to be the best beginner-friendly guide to Call Options**

If you're new to options, we recommend reading the first article first.

# **What is a Call Option?**

A Call Option is a contract that grants the buyer the **right** to purchase the underlying asset at a **specified price** within a **specific timeframe**.  
 

*For example, on March 31, TSMC's stock price is 130 yuan, and you buy an option for 5 yuan with a strike price of 140 yuan expiring on September 30.*

The buyer has the right to purchase TSMC at 140 yuan anytime before September 30, **even if TSMC's price rises to 200 yuan**.  
 The buyer can also **choose to forfeit this right, such as if TSMC's price drops to 130 yuan**.

# **Why Buy Call Options?**

**<1> High Leverage**  
 Options provide **high leverage**, allowing significant profits even with small upward movements in the underlying asset.

*For example, if the stock price is 100 and the option price is 10, a 1 yuan increase in the stock may lead to a 0.5 yuan increase in the option. This means a 1% stock gain translates to a 5% option gain—a 5x leverage. Of course, if the stock drops 1%, the option loses 5%.*

**The more out-of-the-money the option, the higher the leverage—and the higher the risk.**

Common scenarios include **buying Calls before earnings reports when bullish on a stock**, or **buying Calls during market bottoms to hedge against missing a rebound**. The most extreme example is weekly options.

**<2> Deep In-the-Money Calls as Stock Substitutes**

A classic case is Jensen Huang buying long-term Nvidia Calls: **using deep in-the-money long Calls to achieve low-cost exposure to the underlying stock.**

*On November 22, 2023, Nvidia's stock price was 487, and Jensen Huang bought Nvidia Calls expiring December 20, 2024, with a strike price of 120, paying around 378. **This strategy effectively allowed spending 378 yuan to achieve exposure worth 480 yuan.***

**<3> Adding Potential Upside While Controlling Risk**

For example, the U.S. Swan Fund allocates 90% to Treasury bonds (IEF) and 10% to long-term S&P 500 Calls. **Historically, SWAN has outperformed IEF significantly.**

![Image](https://pub.pbkrs.com/uploads/2024/efde6521a0ad250af22505c6cfa63316?x-oss-process=style/lg)

<4> **Hedging**: Options can also serve as hedging tools. For example, **buying UVXY Calls to hedge systemic risk**.

During the Silicon Valley Bank crisis in March 2023, UVXY surged 100% in three trading days, and out-of-the-money UVXY options multiplied in value. Larger black swan events could yield even greater returns.

![Image](https://pub.pbkrs.com/uploads/2024/863e91286f901635e1041809bb7ed104?x-oss-process=style/lg)

# **Profit & Loss Diagram**

*Assume today is April 1, 2024, with AAPL at 171.48. You buy an August 16, 2024 Call with a strike price of 190 for 4.2 yuan.*  
 

The P&L diagram is as follows (most brokers provide this tool):

![Image](https://pub.pbkrs.com/uploads/2024/94912d7fdf37a87e1532d70d5033bb5e?x-oss-process=style/lg)

### **<1> Premium**

The price paid for the Call is called the premium. Here, the premium is 4.2 yuan per share (420 yuan for 100 shares). **Buying Calls offers limited loss (the premium paid) and unlimited profit potential.**

### <2> **Break-Even Point at Expiry**

Break-even = Strike price + Premium. Here, it's 190 + 4.2 = 194.2. With AAPL at 171.48, the stock must rise to 194.2 to profit. The probability of this strategy succeeding is 24.75%, so **Call buyers generally face low win rates unless the stock rises significantly**.

### **<3> Current P&L**

The orange curve above shows the current P&L relationship between the stock price and Call returns. For example, at 171.48, the strategy breaks even. If AAPL rises to 180.02, the Call gains 298.4. **Most Call buyers exit before expiry upon hitting profit targets.**

### **<4> Maximum Profit**

As the stock price rises, Call profits increase indefinitely. Thus, **Call buying offers unlimited upside**.

Summary: **Buying Calls offers limited loss (premium paid) and unlimited profit potential. Winning requires significant stock appreciation, making success probabilities low. Most traders exit early with profit targets.**

# **Price Composition**

Option price = Intrinsic value + Time value.  
 

**<1> Intrinsic Value**

Intrinsic value = Current stock price - Strike price (for in-the-money options). It reflects immediate profit if exercised. **Only in-the-money options have intrinsic value; out-of-the-money or at-the-money options have zero intrinsic value.**

**<2> Time Value**

Time value = Option price - Intrinsic value.

It represents the premium paid for potential price movements before expiry. **Time decay is the enemy of Call buyers: time value erodes fastest in the final 30 days.**

![Image](https://pub.pbkrs.com/uploads/2024/b11f21811f273d6cac47c0a342908405?x-oss-process=style/lg)

*Example: On April 1, 2024, AAPL is at 170. You buy an August 16, 2024 Call with a 160 strike for 15 yuan.*

*Intrinsic value = 170 - 160 = 10 yuan. Time value = 15 - 10 = 5 yuan.*

# **Factors Affecting Call Prices**

Six key factors: **Underlying price; Strike price; Implied volatility; Time to expiry; Risk-free rate; Underlying dividends**.  
 

<1> **Underlying Price**

Higher underlying prices increase Call values (**strong positive correlation**).

<2> **Strike Price**

Lower strikes increase intrinsic value, making Calls more expensive. **Lower-strike Calls offer less leverage; higher-strike Calls are cheaper but riskier.**

**<3> Implied Volatility**

Higher implied volatility (IV) raises option prices, reflecting greater expected price swings. For example, IV spikes before earnings and collapses afterward.

![Image](https://pub.pbkrs.com/uploads/2024/8c63576e1e59db3f66ef5208aa61e6a7?x-oss-process=style/lg)

**<4> Time to Expiry**

Longer durations mean higher time value. **Decay accelerates sharply in the final 30 days.**

**<5> Risk-Free Rate**

Higher rates slightly reduce time value, but the impact is minimal.

**<6> Dividends**

Dividends may adjust strike prices (except for instruments like TLT).

**Summary:** Focus on **volatility and directional bias**—the other factors are fixed or marginal.

# Settlement at Expiry

U.S. stocks/ETFs use physical settlement: **In-the-money options (even by 0.01) auto-exercise unless margin is insufficient, triggering forced liquidation.**

# **FAQs**

<1> Are cheaper Calls better?  
 No. Deep out-of-the-money or near-expiry Calls are cheaper but have lower success rates (e.g., weekly options). **Only gamble what you can afford to lose, or balance probability/payout.**

<2> What Calls make sense?

Buy Calls when **trends are emerging (rapid upside likely) and IV is relatively low**.

<3> Do Calls require margin?

No, buying Calls uses premium only.

<4> Can Calls be exercised early?

Yes, but **closing the position is usually better** to retain time value—unless dividends justify early exercise.

<5> What if I lack cash to exercise?

Brokers auto-liquidate in-the-money options if margin is insufficient.

<6> How do value investors use Calls?

Long-dated, deep in-the-money Calls (like Jensen Huang’s Nvidia trade) can replace stock ownership.

### Related Stocks

- [TSM.US - Taiwan Semiconductor](https://longbridge.com/en/quote/TSM.US.md)

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> **Disclaimer**: This article is for reference only and does not constitute any investment advice.
