When used correctly, call options can generate high returns with minimal capital. However, if used incorrectly, you can lose a significant amount of money even if you accurately predict the stock's direction.
Especially for medium- to long-term investments, the key issue when using call options isn't just "which stock will rise?" Factors such as expiration, strike price, volatility, and position size are just as important as the choice of stock itself.
If I want to play a long-term investment thesis using options, I steer clear of short-term calls as much as possible. This is because time works against you; if the stock trades sideways for a few months, the position's value steadily declines due to theta decay, even if your investment thesis remains intact.
That is why I generally find LEAPS—call or put options with maturities of roughly one year or longer—to be a more logical choice.
Of course, there are a few key points to consider:
• Expiration: I prefer to choose an expiration date that extends a few months beyond when I expect my thesis to play out. If the catalyst you anticipate is in June, buying a June-expiring option strikes me as taking unnecessary risk.
• Strike: Instead of deep out-of-the-money (OTM) calls, I prefer contracts that are in-the-money (ITM) or close to at-the-money (ATM). Calls with a delta between 0.70 and 0.85, in particular, track the stock's movement more closely and are less sensitive to time decay.
• Implied Volatility (IV): Buying calls when IV is very high is like purchasing expensive insurance. Even if the stock rises, a drop in IV can erode your profits. You need to be especially careful about this with stocks approaching earnings announcements.
• Liquidity: I always avoid contracts with low open interest and volume, or wide bid-ask spreads. These lead to unnecessary financial losses when entering or exiting a position.
• Position size: Just because options offer greater leverage doesn't mean I have to take on more risk. On the contrary, since options are riskier instruments than standard stocks, it is necessary to keep position sizes smaller.
The most important point is this:
Buying a long-term call option is not automatically better than buying the stock itself.
For instance, suppose you believe Nvidia’s stock price will rise significantly over the next two years. When you buy the stock, there is no time limit; you can hold it for as long as you wish. With LEAPS, however, getting the direction right isn't enough; the price movement must also occur quickly enough.
That is why I view call options not as a tool for "maximizing gains," but rather as a means of achieving capital efficiency.
For example, instead of a $20,000 stock position, you could achieve a similar return using $7,000–$8,000 in long-term call options and keep the remaining capital in cash. However, in exchange, you assume risks related to expiration, theta (time decay), IV (implied volatility), and the strike price. For the uninitiated, these are very difficult concepts to grasp.
For me, the ideal use case is as follows:
I have a long-term bullish thesis on a strong company, I do not want to tie up all my capital in the stock due to valuation or market conditions, and I am able to allow enough time for the anticipated move to materialize.
In such scenarios, a well-chosen LEAPS call option can be extremely useful.
However, buying a 3-to-6-month out-of-the-money (OTM) call and labeling it a "long-term investment" is something else entirely. That is essentially a leveraged bet on market timing—it falls more into the category of short-term speculation.
Once you learn the ropes, you will see that it is actually quite simple rather than complex. Yet, for those unfamiliar with them, these derivatives can be very confusing.
