Now that you have a better understanding of what options are, what calls and puts are, let's look at how to buy a call option in a little more detail. To buy a call, you must first identify the stock you think is going up and find the stock's ticker symbol. When you get a quote on a stock on most sites you can also click on a link for that stock's option chain.
The option chain lists every actively traded call and put option that exists for that stock. When you request an option chain on the CBOE website for the stock that you want to buy a call, you will see the calls listed in the left column and the puts listed in the right column.
To view other months you will have to toggle the "Expiration" drop-down menu. First of all, you must realize that not all stocks have options that trade on them. Only the most popular stocks have options. Secondly, you cannot always buy a call with the strike price that you want for an option. Thirdly, you will not always find the expiration month you are looking for on the option for which you want to buy a call. Usually you see the expiration months for the closest two months, and then every 3 months thereafter.
Fourthly, even if you do find the option that you want to buy a call on, you need to make sure it has enough volume trading on it to provide liquidity so that you can sell it if you decide to. Finally, to buy a call you need to understand what the option prices mean and find one that is reasonably priced. As you might expect, option prices are a function of the price of the underlying stock, the strike price, the number of days left to expiration, and the overall volatility of the stock.
While the first 3 of these stock price, strike price, and days to expiration are easily agreed upon, it is the volatility and the expected volatility of the stock that traders differ in opinion and therefore drives prices. This is one of the most important things to understand when you go to buy a call. Call and Put Option Trading Tip: When you buy a call option, you need to be able to calculate your break-even point to see if you really want to make a trade.
Now let's look at a specific example of buy a call so this starts making sense. Are you starting to see the attractiveness of trading options and are you ready to buy a call!
Now, here's the risky part of trading options. Now you see the risk that you take on when you buy a call! Buy a Call Conclusion: If you are sure that a stock is going to pop up a few points before the next option expiration date, it is the most profitable and the most risky to buy a call option with a strike price slightly higher than the current stock price.
If you want to be a little more conservative, you can also buy a call option with a strike price below the current stock price. When in doubt as to whether to buy a call with a low strike price or buy a call with a higher strike price, it is always good to look at the volume that is happening in the real market and go where the volume is I call this following the "smart money".
Here is the one of the most important characteristics about option trading that you must know before you buy a call: Stock prices move in 3 directions--not only do stock prices move up and down, but they also can stay the same. Now that you know how to buy a call and understand the importance of strike prices when you buy a call, the next topic addresses selling calls , also known as writing calls.
Here are the top 10 option concepts you should understand before making your first real trade:. What are Stock Options? What is a Stock Option? What is a Call Option? What is a Put Option? Buying A Call Option. What are Call Options? Here are the top 10 option concepts you should understand before making your first real trade: What is a Call? What is a Put?More...