The index long call is the easiest strategy to use in index options trading and the execution involves the purchase of an index call option.
The options trader initiates index long call strategy when he expects underlying index level will rise sharply above the call strike price within a short period of time.
As there is no limit how high index level can go at the expiration date, there is no limit to the maximum profit possible when executing index long call option strategy.
Risk for the index long call strategy is capped and is equal to the price paid for the index call option no matter how low the index is trading on expiration date.
when underlying asset price is equal to sum of index call strike price and premium paid for the index long call option.
ABC index is indicator of entire stock market and its value in January is 300. Option trader thinks broader market will advance in short term, purchases march expiry month index call option with strike price of $300 for traded price of $3 per contract. The cost of index long call option comes to $300 as contract size is 100.
Now if ABC index go to 320 in march and trader’s march 400 call expires in-the-money. At the expiration value 320, march 300 ABC index long call option value will be $20. Exercising the option will give a trader settlement value of $2000 ($20 x 100 contact value) . Cost of Index call option was $300 so trader’s net profit will be $1700.
If ABC index goes below 300 at the end of march expiry the march index call option will be zero and trader will face net loss of $300 which is the amount paid for index call option.