Call Options Wiki
Buying
a Call Option
Buy
when you think a stock will be going up
When you buy an option, you are entering into a contract with someone
who owns a stock. You are giving this stock owner a small retainer fee
to have the "option" to buy his box of stocks at some time in the
future that you both agree upon in the contract.
If
the stock goes up, you can choose to buy those stocks "call in" and
turn right around and sell them for the built in profit since they are
now up in price.
Your
profit is the difference between what you can sell the stock for
and what you paid, minus the contract fee you paid for the option on
those stocks.
Lets
assume the contract is set to expire, the stock price is up and you opt
to buy the stocks obligated in the contract.
Call
option payoff diagram
The
call option break even is when the price of one stock plus 1/100 of the
call option fee added to it, is surpassed by a penny.
You
could also sell the contract itself to someone else prior to the
expiration date of your contract. This is the best way usually since
you then do not have to come up with all the money needed to purchase
the stock at the end of the contract. Sure you can turn right around
and sell the stocks but you do have to have money to actually buy them
in the first place.
In
this case, the call option break even is when you can sell the call
option contract for a penny more per contract than you paid.
Of course if the stock goes down you then choose not to buy those
stocks and all you lose is the fee you paid for the contract.
the option is yours
Selling a Call Option.
Popular way
to generate small steady income.
If
you are confident that a stock is going to stay about the same of even
go down, then selling a call option on that stock can get you income
without doing much.
If
you are right, you already collected the option fee and the stock will
not get purchased in the end. Since it didn't go up enough, the person
opts to not buy it and the contract expires.
You
get to keep the stocks (covered call) you own and keep the fee you were
paid. You can do this over and over if you understand a stock's trends
well enough. This is a stock market system in itself.
option trading system
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