How to Buy Call Options

How to Buy Call Options

You've been playing the stock market for a while, and you've started to get interested in options. As high-risk investments, call options are really only suitable for advanced traders who have a strong understanding of the stock market.[1] X Research source If that sounds like you, you can use call options to control relatively large amounts of stock without investing a lot of money. Essentially, you're placing a bet that the value of the underlying stock will rise, at which point you'll make a profit by purchasing the optioned shares at the price specified in your option. If you turn out to be wrong, you're only out the relatively low amount you paid for the option.[2] X Research source

Method 1 of 2:
Buying Call Options

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1
Read options tables to find potentially profitable options to buy. You can find options tables online or through your broker's website. Spend some time learning and understanding the symbols used on the tables so you can make sense of them to choose the best options contracts for your portfolio. [3] X Research source Each source has its own format, so find one and stick with it rather than trying to switch between different ones. While they might be formatted differently, they'll all have basically the same data.
2
Get a call option by itself if you anticipate the stock price will increase. When you're fairly certain that the price of a particular stock is going to increase within the next few months, but not sure enough to buy the stock outright yet, go for a call option. If the stock price doesn't increase the way you predicted, you won't be out as much money. [4] X Research source For example, suppose the stock you're interested in is currently trading at $50 a share, but you think it's going to continue to rise. You could spend $5,000 to buy 100 shares, but what if the stock goes down? Instead, you could buy a one-month call option for $300 that gives you the right to buy 100 shares of the stock for $50 a share. At the end of the month, if the stock is down to $40 a share, you'll be thanking your lucky stars that you're only out the $300.
3
Buy call and put options together if you're unsure of the stock's direction. This strategy works best if you're fairly certain that the stock is going to move, you just don't know which direction it's going in. The put option gives you the right to sell at a certain price, while the call option allows you to buy at a certain price. One of these will likely be "in the money" (make a profit for you) regardless of what happens to the price of the underlying stock. [5] X Research source For example, suppose you bought a call option for $300 and a put option for $300. The "strike price" (the price you have the right to buy or sell the stock for) is $50 for both contracts. If the price of the underlying stock increased to $65, you would exercise the call option. On the other hand, if the price dropped to $40, you would exercise the put option.
4
Multiply the contract premium by 100 to find the total price. American options are typically a contract for the right to buy 100 shares. The contract premium is listed as the amount you'll pay per share, so to find the total cost of the contract, multiply by 100. [6] X Research source For example, if you're looking at an options contract that has a premium of $2, that doesn't mean you're only paying $2 for the right to purchase $100 shares of stock — it means you're paying $200, or $2 per share. Keep in mind that if you're going to exercise a call option, you still have to buy the underlying stock. All your premium is paying for is the right to buy it at a specific price.
5
Make your purchase when the market is relatively stable. If the market is volatile, the price of options increases. The more volatile and unpredictable the market is, the higher those prices will be. Wait until the market is relatively stable before investing in options to get the best possible prices. [7] X Research source Buying options in a volatile market isn't necessarily a bad thing, and you might want to do it if you're trying to hedge against potential losses. Just be aware that it'll cost you more in premiums than you would pay in a time of stability.
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Method 2 of 2:
Exercising Call Options

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1
Buy the underlying shares if the market price is higher than your option price. When the market price goes above the strike price on your options contract, you're "in the money." If you exercise your option, the seller is required to sell you 100 shares of the underlying stock at your option price, rather than the market price. This means you're getting the underlying stock at a discount. [8] X Research source For example, suppose you bought an option for $500 with a strike price of $40. With one week before the expiration date, the underlying stock is trading at $50 a share. If you exercised your option and bought 100 shares at $40 a share, you'd make $1,000. If you then went on to sell the underlying stock after you bought it, you would potentially make even more profit on the transaction because you bought the stock below the market price. You could also just hold it to see if it increases in value. You can also just wait until the expiration date to exercise your option, especially if it looks like the price of the stock is going to continue to increase. With European call options, you're required to wait until the expiration date. However, you can exercise American options at any time.[9] X Research source
2
Offset the option with an equal and opposite trade to cancel it. If you want to cut your losses and get out of your options contract, you can try to sell the same option with the same expiration date and the same strike price. This would mean your only loss would be the difference between the premium you paid and the price you sold it for. [10] X Research source For example, suppose you bought a 1-month call option with a strike price of $50 for $200. Rather than rising in value, the underlying stock starts to drop, which makes your option worthless. However, you're able to sell your option for $150. You would only be out $50, as opposed to the original $200 you paid for it. If your trade doesn't exactly match your original options contract, you've likely limited your losses on the original option, but you haven't canceled it out completely. You can only cancel it out completely by selling the exact same options contract as the one you bought.
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3
Let the option expire if the stock price doesn't increase. If you don't exercise your option by the expiration date, it becomes worthless. Remember, an option is merely the right to buy shares of stock at a certain price before a certain date. Once that date passes, you no longer have that right. [11] X Research source If the underlying stock has lost so much value that it would be impossible to offset the loss by selling it, letting the option expire might be all you can do. You might also want to let an option expire if you've simply decided, for whatever reason, that you don't want to own the underlying stock. For example, it might've gone up, but not as much as you wanted it to. Talk to your broker before you make the decision to simply let an option expire, particularly if you're "in the money." Some brokers automatically exercise options that are in the money, rather than simply letting them expire. This might not be the best deal for you if you don't want to own the underlying stock.
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Method 1 of 2:
Buying Call Options

Image titled Register to Vote Step 10
1
Read options tables to find potentially profitable options to buy. You can find options tables online or through your broker's website. Spend some time learning and understanding the symbols used on the tables so you can make sense of them to choose the best options contracts for your portfolio. [3] X Research source Each source has its own format, so find one and stick with it rather than trying to switch between different ones. While they might be formatted differently, they'll all have basically the same data.
2
Get a call option by itself if you anticipate the stock price will increase. When you're fairly certain that the price of a particular stock is going to increase within the next few months, but not sure enough to buy the stock outright yet, go for a call option. If the stock price doesn't increase the way you predicted, you won't be out as much money. [4] X Research source For example, suppose the stock you're interested in is currently trading at $50 a share, but you think it's going to continue to rise. You could spend $5,000 to buy 100 shares, but what if the stock goes down? Instead, you could buy a one-month call option for $300 that gives you the right to buy 100 shares of the stock for $50 a share. At the end of the month, if the stock is down to $40 a share, you'll be thanking your lucky stars that you're only out the $300.
3
Buy call and put options together if you're unsure of the stock's direction. This strategy works best if you're fairly certain that the stock is going to move, you just don't know which direction it's going in. The put option gives you the right to sell at a certain price, while the call option allows you to buy at a certain price. One of these will likely be "in the money" (make a profit for you) regardless of what happens to the price of the underlying stock. [5] X Research source For example, suppose you bought a call option for $300 and a put option for $300. The "strike price" (the price you have the right to buy or sell the stock for) is $50 for both contracts. If the price of the underlying stock increased to $65, you would exercise the call option. On the other hand, if the price dropped to $40, you would exercise the put option.
4
Multiply the contract premium by 100 to find the total price. American options are typically a contract for the right to buy 100 shares. The contract premium is listed as the amount you'll pay per share, so to find the total cost of the contract, multiply by 100. [6] X Research source For example, if you're looking at an options contract that has a premium of $2, that doesn't mean you're only paying $2 for the right to purchase $100 shares of stock — it means you're paying $200, or $2 per share. Keep in mind that if you're going to exercise a call option, you still have to buy the underlying stock. All your premium is paying for is the right to buy it at a specific price.
5
Make your purchase when the market is relatively stable. If the market is volatile, the price of options increases. The more volatile and unpredictable the market is, the higher those prices will be. Wait until the market is relatively stable before investing in options to get the best possible prices. [7] X Research source Buying options in a volatile market isn't necessarily a bad thing, and you might want to do it if you're trying to hedge against potential losses. Just be aware that it'll cost you more in premiums than you would pay in a time of stability.
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Method 2 of 2:
Exercising Call Options

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1
Buy the underlying shares if the market price is higher than your option price. When the market price goes above the strike price on your options contract, you're "in the money." If you exercise your option, the seller is required to sell you 100 shares of the underlying stock at your option price, rather than the market price. This means you're getting the underlying stock at a discount. [8] X Research source For example, suppose you bought an option for $500 with a strike price of $40. With one week before the expiration date, the underlying stock is trading at $50 a share. If you exercised your option and bought 100 shares at $40 a share, you'd make $1,000. If you then went on to sell the underlying stock after you bought it, you would potentially make even more profit on the transaction because you bought the stock below the market price. You could also just hold it to see if it increases in value. You can also just wait until the expiration date to exercise your option, especially if it looks like the price of the stock is going to continue to increase. With European call options, you're required to wait until the expiration date. However, you can exercise American options at any time.[9] X Research source
2
Offset the option with an equal and opposite trade to cancel it. If you want to cut your losses and get out of your options contract, you can try to sell the same option with the same expiration date and the same strike price. This would mean your only loss would be the difference between the premium you paid and the price you sold it for. [10] X Research source For example, suppose you bought a 1-month call option with a strike price of $50 for $200. Rather than rising in value, the underlying stock starts to drop, which makes your option worthless. However, you're able to sell your option for $150. You would only be out $50, as opposed to the original $200 you paid for it. If your trade doesn't exactly match your original options contract, you've likely limited your losses on the original option, but you haven't canceled it out completely. You can only cancel it out completely by selling the exact same options contract as the one you bought.
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3
Let the option expire if the stock price doesn't increase. If you don't exercise your option by the expiration date, it becomes worthless. Remember, an option is merely the right to buy shares of stock at a certain price before a certain date. Once that date passes, you no longer have that right. [11] X Research source If the underlying stock has lost so much value that it would be impossible to offset the loss by selling it, letting the option expire might be all you can do. You might also want to let an option expire if you've simply decided, for whatever reason, that you don't want to own the underlying stock. For example, it might've gone up, but not as much as you wanted it to. Talk to your broker before you make the decision to simply let an option expire, particularly if you're "in the money." Some brokers automatically exercise options that are in the money, rather than simply letting them expire. This might not be the best deal for you if you don't want to own the underlying stock.
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