Long calls lie at the beginning of the options path. They’re simple and mark the first of two building blocks (puts are the second) that every trader uses to construct positions. Profiting with calls, however, is deceptive. It looks like it should be easy, but it’s not.

The challenge lies with leverage. Minimizing losses is challenging. Even a well-placed exit will still deliver a 30% to 50% loss of your invested capital. And it that’s your average loss, then you need a substantial average win to offset it.

And that’s what brings us to today’s piece. I want to talk about smart ways to maximize your gain on a long call option. Let’s use the rounded bottoming pattern in Lyft to illustrate.

The Chart

Say what you will about LYFT stock’s post-IPO beatdown, but it’s been exceptionally well behaved from a technical analysis standpoint. Bear retracement and breakout patterns worked on the way down, and the uptrend that has since emerged has seen bull retracements and breakouts work.

Altogether the last two months look like an inverted head and shoulder pattern that is on the cusp of completion. Suppose we look to long calls as our vehicle for capitalizing on the looming breakout.

By the way, the implied target for a head & shoulders setup is the height (or depth, in this case) of the pattern. Take the distance between the neckline and head, and add it to the neckline.

The Trade

To fully embrace the speculation and cheapen the trade cost, let’s purchase the July $70 calls for $1.25. The minimal capital outlay means we don’t have to worry about using a stop loss. So there’s no chance of whipsaw or getting shaken out of the trade prematurely. I would purchase one contract for every $125 I’m willing to risk.

The con, of course, is the lower probability associated with buying OTM calls. I think it’s a fair trade-off in situations where we expect a strong rally, though.

The Magic

If LYFT stock rallies as expected, the call will rise in value toward $200 and beyond. Here are a few ideas for properly managing the profitable position. The objective is to reduce risk while keeping ourselves open to additional reward.

Scale-out

We begin with the simplest tactic of them all. Scale-out is trader-speak for taking partial profits. If you buy two calls, you could sell one at a tidy profit and let the other ride. This creates a win-win scenario. If LYFT keeps ripping after your first exit, at least you still have half your position. If the stock retreats, well, at least you sold some.

Roll-up

This technique consists of replacing your profitable call, which has now become expensive, with a cheaper one. Say LYFT stock pops to $70 and our Jul $70 call grows from $1.25 to $2.50. Rolling up would consist of selling to close the Jul $70 call while buying to open a Jul $75 for maybe $1.00. The adjustment would bring in a net credit of $1.50 ($2.50 – $1.00) thus fully removing your risk from the position.

Roll to a vertical

The final idea is known as rolling to a vertical. You could also say we’re rolling to a bull call spread. All it entails is selling a higher strike call against the one you purchased. The expiration dates will be the same. We bought the July $70 call for $1.25. Suppose LYFT rises to the point where we can sell the July $75 call for $1.25. That would create a July $70/$75 bull call spread for zero cost. You’ve officially finagled your way into a risk-free bull call spread!

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