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