Buying calls can be a less capital-intensive way to gain long exposure to the shares without buying shares outright. However, long options suffer from time decay, and the value may decrease each day the underlying does not move toward the strike price. As a result, the underlying must rise at a greater velocity towards the call options' strike price to make up for lost value.
Out-of-the-money (OTM) calls are usually cheaper than in-the-money (ITM) calls. That is because the value of an OTM call is entirely made up of extrinsic value. ITM calls will have intrinsic and extrinsic value, resulting in a higher cost per contract. Over time, the extrinsic value of all options decays to $0.00 as expiration approaches. Meanwhile, ITM calls will retain their intrinsic value at expiration, and any extrinsic value will decay down to $0.00 near or at expiration.
The ideal scenario of a long ITM call option is to have the underlying rise as much as possible so it gains intrinsic value and is worth more at expiration than what the trader purchased the call option for upfront. This is the same scenario for OTM call options since OTM call options need to move ITM at expiration to have any value. Before expiration, OTM and ITM call options can gain a combination of extrinsic and intrinsic value if the stock moves swiftly to the upside.
Long call options that expire ITM by $0.01 or more will be auto-exercised. Investors only holding a long call will result in 100 long shares* per contract purchased at the call option's strike price. Investors holding the corresponding short shares will cover or buy shares at the call option's strike price. It's important to note that investors who want to avoid the long call contract from auto-exercising for expiring ITM may sell the contract before the market closes on the expiration day. Any long call options that expire OTM will expire worthless, resulting in a maximum loss for the investor. The following section covers more about potential profit and loss of a long call.
*Only accounts with sufficient account equity may hold and maintain the long stock position. Any account holding a long call subject to expiration risk may be closed out by the risk team. Please visit the Help Center to learn more about expiration risk.