What is the downside potential of a long call option?

The downside potential of a long call option is characterized by limited downside. When an investor purchases a long call option, they acquire the right, but not the obligation, to buy a specified asset at a predetermined price (the strike price) before a specific expiration date.

The most significant point to understand about the risk associated with long call options is the premium paid for the option itself. If the underlying asset does not increase in value above the strike price before the option expires, the maximum loss that the investor faces is limited to the amount of the premium that was paid for the option. This is because the investor can choose not to exercise the option, and thus they forfeit the premium but do not incur any further losses.

This feature provides a protective benefit when compared to other investment forms, like holding a stock, where potential losses can be substantial. Therefore, the risk is confined to the initial investment (the premium), making it a limited downside scenario.