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How to Choose the Right Call Option

Published July 3, 2025

If you're interested in using call options to gain long-term exposure to the stock market with leverage, you're not alone. At BackAlpha, we've explored this approach extensively — both through data and in our own portfolios.

However, not all call options are created equal. To build a successful long-term strategy using calls, you need to make three critical decisions:

  • Which stock or ETF to use as the underlying
  • What expiration date to choose
  • How to select the right premium, strike price, and leverage level

In this post, we’ll walk through each of these components — sharing what has worked best for us and why. The goal is to help you apply leverage wisely, with less stress and more confidence.

1. Choose the Underlying Stock

The first and most fundamental decision is choosing the asset you want to gain exposure to. For our strategy, we overwhelmingly favor SPY — the ETF that tracks the S&P 500.

  • Broad Market Exposure: SPY reflects the entire U.S. market. While individual stocks can soar or crash based on earnings, lawsuits, or leadership changes, SPY is driven by larger macroeconomic forces. That makes it more stable, more predictable, and more suitable for a long-term leveraged approach.
  • Exceptional Liquidity: SPY is the most traded ETF on the planet. Tight bid/ask spreads and massive trading volume ensure low transaction costs and minimal slippage — especially important when you’re dealing with options.
  • Daily Expiration Options (0DTE): SPY offers options expiring every trading day. Most stocks offer only weekly or monthly expirations. SPY’s daily expirations give you maximum flexibility when managing your position, especially during volatile periods.

Why Not Choose QQQ?

QQQ, which tracks the Nasdaq-100, is another popular choice. Its tech-heavy weighting has helped it deliver eye-catching returns during strong bull markets, especially in the past decade.

However, based on our analysis, SPY holds several key advantages:

  • Superior Liquidity: SPY trades around 83 million shares per day, compared to about 53 million for QQQ. And because SPY shares are more expensive, the total dollar volume is even more skewed. That extra liquidity means SPY is favored by institutions and high-frequency traders alike.
  • Long-Term Consistency: SPY has actually delivered slightly better annualized returns over its full history, even though QQQ has had spectacular bull runs. Check out the data for yourself: Buy and Hold SPY vs Buy and Hold QQQ.
  • Option Efficiency: QQQ’s higher volatility leads to higher premiums — which means faster time decay. When you're buying call options, especially deep ITM, SPY’s lower extrinsic value can work in your favor.

Cons of Choosing SPY

  • Limited Upside Potential: SPY won’t deliver the 10x or 20x returns that some individual stocks can. If you’re chasing explosive growth, SPY may feel “too slow.”

Still, for a leveraged long-term strategy, we believe the predictability and efficiency of SPY far outweigh its limitations.

2. Choose the Expiration Date

Once you've selected your underlying — in our case, SPY — the next step is to choose the expiration date of your call option. We prefer the longest expiration available, typically 2 to 3 years out.

Why go long? Because it gives you more control, more time, and fewer decisions. Here’s what that means in practice:

  • Reduced Frequency of Rolling: Short-dated options require constant maintenance. You need to “roll” — close the current position and open a new one — frequently. Long-dated options significantly reduce this need, making the position easier to manage over time.
  • Slower Time Decay (Theta): Time decay accelerates as expiration nears. Long-dated options, especially when deep in the money, lose extrinsic value at a much slower pace — which makes them more durable during holding periods.
  • More Room for Recovery: Markets are volatile and don’t move in straight lines. A temporary decline in SPY can wipe out a short-dated call, but a long-dated call gives the trade time to recover. This flexibility can be critical to the success of a position.

Leverage Drift Over Time

One consequence of holding long-dated calls is that leverage tends to decrease as the underlying price rises. For example, if SPY is trading at $600 and you buy a 50% strike call (i.e., strike at $300), and SPY later rises to $750, your strike becomes a 40% level. The option becomes very deep in the money, and delta approaches 1.0. At that point, each additional dollar gain in SPY results in roughly a dollar gain in the option — but the leverage (return per dollar invested) is reduced.

This behavior is expected. Many strategies begin with 3x or 4x effective leverage, and even if that leverage drifts down to 2x or 3x, the position still benefits from significant exposure. There’s typically no need to manage the strike mid-hold unless the strategy explicitly requires it. But if maintaining a constant leverage profile is important, rolling up the strike can be used to reset the delta.

Tax Considerations

Because SPY options are equity options, they follow standard capital gains tax rules. If you hold a SPY call option for more than one year, any gain qualifies as long-term capital gain, taxed at a preferential rate.

This is an important advantage when using long-dated options. While the strategy may exit positions earlier based on signals, when a trade does last more than a year, the tax treatment becomes materially more favorable.

3. Choose the Premium / Strike Price / Leverage

The final step is choosing your strike price — or more precisely, choosing your desired leverage. Once you decide how much leverage you want, the corresponding premium and strike price can be determined accordingly.

Here’s how the relationship works (assume SPY is trading at $618):

Leverage Premium (% of stock price) Example (SPY = $618)
2x ~50% ~$309
3x ~33.3% ~$206
4x ~25% ~$154.50

Once you've chosen a target leverage (say, 3x), the premium is simply calculated as: 

  Premium = Stock Price ÷ Leverage

So if SPY is trading at $618 and you want 3x leverage, your premium target is about $206. That part is pure math.

The next step is to check the options chain to find a strike price whose premium is close to that target. For 3x leverage, you'd look for a long-dated call option priced around $206. Depending on market conditions (like implied volatility), the exact strike may vary slightly.

Based on our data and experience, we recommend aiming for 3x to 4x leverage. This strikes a healthy balance between return and risk:

  • Less than 3x: The leverage is too mild. Your return may not justify the effort compared to simply buying shares.
  • More than 4x: Although still ITM, these options have lower delta and higher time decay. You’ll feel more volatility and likely suffer worse drawdowns.

As always: if you're not seeking leverage, don’t use call options. Just buy the stock. Calls come with time decay and forfeit dividends — costs that only make sense when you're aiming to amplify returns.

The Critical Importance of Exit Strategy

Warning: If you use leverage through call options, you absolutely must have a strategy to exit your position. Unlike buying and holding stocks, leveraged positions can result in a complete loss of capital if the underlying asset declines significantly or if time decay erodes the option's value.

Simply buying call options and holding them indefinitely is a recipe for disaster. You need clear rules for when to take profits, cut losses, or roll positions. Whether it's technical indicators, price targets, or time-based exits, having a systematic approach to managing your leveraged exposure is essential for long-term success.

The specifics of when and how to exit positions deserve a separate blog article — we won't cover too many details here. For now, you can explore the crossover strategies on BackAlpha.com, which demonstrate various systematic approaches to entry and exit signals using technical indicators like moving averages.

Conclusion

The right call option can be a powerful tool for long-term investors who want to apply responsible leverage. But the wrong choices — wrong expiration, wrong strike, wrong underlying — can lead to frustration or unnecessary risk.

At BackAlpha, we’ve designed our tools to help you test these choices with real historical data. You can model SPY call strategies and evaluate how leverage would’ve performed through decades of bull and bear markets.

Explore now: visit the Crossover Strategy, SPY Buy & Hold, or QQQ Buy & Hold pages.