Gaining Exposure 	 	•	 189
Long Call
GREEN
Downside: Fairly priced
Upside: Undervalued
Execute: Buy a call option
Risk: Amount equal to premium paid
Reward: Unlimited less amount of premium paid
The Gist
An investor uses this strategy when he or she believes that there is a material 
chance that the value of a company is much higher than the present market price. 
The investor must pay a premium to initiate the position, and the proportion of 
the premium that represents time value should be recognized as a realized loss 
because it cannot be recovered. If the stock fails to move into the area of exposure 
before option expiration, there will be no profit to offset this realized loss.
In economic terms, this transaction allows an investor to go long an 
undervalued company without accepting an uncertain risk of loss if the 
stock falls. Instead of the uncertain risk of loss, one must pay the fixed pre-
mium. This strategy obeys the same rules of leverage as discussed earlier 
in this book, with in-the-money (ITM) call options offering less leverage 
but being much more forgiving regarding timing than are at-the-money 
(ATM) or especially out-of-the-money (OTM) options.