Utilize call options effectively to amplify returns in a rising market.

We know that there are mainly two ways to trade stocks.

If you expect the stock price to rise, you can establish a 'long' position, first buy the stock, and sell it after a period of time.

Alternatively, if you expect the stock price to fall, you can short sell the stock.

In the world of options, the way of trading is much richer than buying and selling stocks.

In addition to simply 'going long' and 'short selling', traders can also achieve their investment goals by constructing various strategy combinations.

This is why many advanced investors are attracted by the charm of options.

For beginners, it is necessary to understand the two most basic strategies before further understanding complex options trading strategies: buying call options (Long call) and buying put options (Long put).

In this issue's video, let's start with buying call options.

If you are bullish on a certain stock and expect it to rise in the near future, you may want to allocate 100 shares of that asset, valued at around 0.01 million US dollars.

In that case, you can either buy the stock directly or purchase a call option on it.

If you choose to buy 100 shares directly, you will need to pay 0.01 million US dollars in cash; alternatively, you can finance through a brokerage and pay a certain amount of interest.

If you choose to buy a call option, due to the leverage effect of options, you may only need to invest a few hundred dollars.

Please note that options have a leverage effect: when the stock price rises, the increase in value of a call option is often greater.

When the stock price falls, the decline in value of a call option is also often greater.

Therefore, while options amplify potential profits, they also increase potential risks.

Next, let's discuss the key points of the 'buying call options' strategy.

Taking a specific options chain as an example, here is a bullish option with a strike price of $55 and an option premium of $1.35.

Due to the fact that the multiplier for US stock options is 100 shares, if you were to buy one contract of this bullish option, you would need to pay $135 ($1.35 x 100).

Now, let's take a look at the profit and loss analysis chart for buying a call option:

In the scenario of buying a call option, the worst case is when the stock price on the expiration date is below or equal to the strike price, rendering this call option worthless, and your maximum loss would be the option premium you paid.

For simplicity, we will not take into account commissions and other transaction fees here.

However, reality may not be as harsh. If the stock price rises above the strike price, then the call option will have intrinsic value, which is calculated as the stock price minus the strike price.

But if the stock price does not rise significantly, you could still incur losses because you paid an option premium when buying the call option.

In other words, your breakeven point occurs when the stock price equals the strike price plus the option premium.

When the stock price rises above the break-even point, your profit is positive. In theory, the stock price can rise indefinitely. Therefore, the potential maximum profit of buying call options is unlimited.

Let's summarize. Buying call options and holding until expiration can result in three investment scenarios:

First, when the stock price ≤ the strike price, the option becomes worthless, with no value, thus the maximum loss is the option premium;

Second, when the strike price < stock price ≤ the break-even point, the option has intrinsic value, but insufficient to cover the paid premium, resulting in a partial loss;

Third, when stock price > the break-even point, the option's intrinsic value exceeds the premium paid, resulting in a positive investment return.

Remember, there is no need to hold options until expiration. Doing so will cause you to lose all time value.

Therefore, once the price increase of call options reaches your expected return, you should consider closing the position. The principle of 'buy low, sell high' is often applicable.

On the other hand, if the market deviates from your previous expectations, you may also need to consider timely stop-loss measures.

For the buyer of options, time is your friend. As the expiration date approaches, your friend will gradually leave you.

Alright, that's it for now on the strategy of buying call options! Have you got it?

In the next video, we will introduce the strategy of buying put options.

See you next time!