This is most basic option strategy for traders who are new in Option trading. This strategy is also known as Buying call strategy. I this strategy the downside risk is limited.
When traders are bullish about the prospects for a stock/index, buying call can be an excellent way to capture the upside potential with limited downside risk.
For example, Nifty is currently trading at 8285.15 with 0.12% gain, We are bullish on Nifty. We buy Call Option with a strike price of Rs 8300 at a premium of Rs 60.00 expiring on 29 October 2015.
if Nifty goes above 8360.00(strike price + Premium price), we will make the net profit after deducting the premium price on exercising the option. In case if it falls below 8300, we can give up the option with a maximum loss of the premium.
Current Nifty Index 8285.15
Call Option Strike Price (Rs.) 8300
Premium (Rs.) 60.00.
Break Even Point (Rs. )(Strike Price + Premium Price) 8360.00.