Buying Index Calls

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The index long call is the simplest strategy to use in index options trading and the implementation involves the purchase of an index call option.

The options trader employing the index Long Call strategy believes that the underlying index level will rise significantly above the call strike price within a certain period of time.

Unlimited Profit Potential

Since they can be no limit as to how high the index level can be at the option's expiration date, there is no limit to the maximum profit possible when implementing the index Long Call strategy.

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Limited Risk

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.

Breakeven Point(s)

Example

XYZ Index is a broad based index representative of the entire stock market and its value in June is 400. Believing that the broader market will advance in the near future, an options trader purchases an six-month index call with a strike of 400 index points expiring in December for a premium of 4.50 index points. With a contract multiplier of $100, the cost of the index call option comes to $450.

Suppose XYZ Index went up to 420 in December and the trader's DEC 400 XYZ index call expires in-the-money. At settlement value of 420, the DEC 400 XYZ index call option will possess an intrinsic value of 20 index points and exercising this option will give the trader a settlement amount of $2000 (20 points × $100 per point). Taking into account the cost of the option itself, which is $450, the trader's net profit comes to $1550.

Suppose XYZ Index dropped to 380 in December and the trader's DEC 400 XYZ index call expires out-of-the-money. At settlement value of 380, the DEC 400 XYZ index call option will expire worthless with zero intrinsic value. The trader's net loss is equal to the amount paid for the index call option which is $450.

Commissions

For ease of understanding, these examples exclude commissions, fees and financing costs. Include all costs when comparing an actual position; there is no universal commission amount.

For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.

Out-of-the-money Index Calls

Going long on out-of-the-money calls maybe cheaper but the call options have higher risk of expiring worthless.

In-the-money Index Calls

In-the-money options include intrinsic value and generally cost more than comparable out-of-the-money options of the same type and expiration. Compare premium minus intrinsic value directly; less time value is not guaranteed in every comparison.

Before expiration and assignment

The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.

Index points, settlement and hedge limits

The XYZ Index and its quotes are hypothetical. These examples assume a cash-settled contract with a $100-per-point multiplier. Use the official final settlement value, not an earlier index quote. The selected contract determines last trading time, exercise style and settlement procedure; some index options allow early exercise and others do not.

An index put can hedge market exposure, but a portfolio may not track the index exactly. Quantity, beta, timing, premium and basis risk affect protection. Cash settlement does not deliver the constituent shares. See the current index market guide.