As we have already seen, when you buy a call it is because you have a bullish view of the market. The underlying asset is expected to rise in price.
There are two types of strategies with the purchase of options:
1. Keep the shares:
In this case, you want the price of the shares to rise above the strike of your contract. This way, you can buy them cheaper than they are on the market at the expiry date.
2. Don’t hold on to the shares:
You only want the share price to rise so that the contract becomes valuable enough to sell it and earn the difference between your buy price and your sell price.
For example, you see that AAN shares are trading above $19, and you think the price may go up, so you buy 1 Call Option on AAN with strike 20, paying a premium of $2 per option (i.e. $200 in total) with a 1 month expiry. At that point you are limiting your maximum loss to the premium paid, in case you have not put a stop. Here you must manage your capital on each trade, of course, applying money management.
Assuming the bullish strategy goes as you expected and now the stock went up to u$s24. You have a choice:
1. keep the shares:
Tell the broker that you want to buy the 100 shares at u$s20 and keep them to sell later, or sell them that day at the market value which would be:
Contract premium investment: 100xu$s2=u$s200
Investment shares: 100xu$s20=u$s2000
Sale of shares: 100xu$s24=u$s2400
Profit: u$s200
2. Not keeping the shares:
You decide to sell the contract (placing an order) to keep the difference, as it has appreciated in value and is now trading at u$s4.50.
Contract premium investment: 100xu$s2=u$s200
Contract sale: 100xu$s4.50=u$s450
Profit: u$s250
In general, most traders sell the contract before expiry when it has appreciated in value (sometimes on the same day of early expiry, sometimes a few days before, the important thing is that it has not expired). Very few exercise it, keeping the shares. It is worth noting that you can earn the same in cash. In the example, if the contract is worth u$s4 it would give a profit of 200, the same as the sale of the shares on the same day. What happens is that the person who keeps the shares rarely sells them at the expiration of the contract. They usually use this strategy to hold on to the shares for a longer period of time and sell them when they become even more valuable.
In case the upside doesn’t happen, you either lose the premium if you don’t have a stop, or you hit your stop.