Buying Call Options
Buying calls is the most basic options trading strategy.
A call options buyer is a trader who believes in a rising market and expects to
profit from an upward price move. By buying calls an options trader is buying a
right to purchase the underlying stock at a specific price, at or before the
expiration date. The call options buyer profits if the underlying stock price
moves up and conversely he/she loses money if the price of the underlying stock moves down.
The maximum loss a call options buyer may experience is the premium paid for the
calls. The maximum profit is theoretically unlimited.
Suppose the QQQQ is presently trading at $43.00 per share. If you are in a
bullish mood you could purchase a QQQQ call option to greatly leverage your
profits from your anticipated upward movement. You may purchase QQQQ calls with
a strike price of $43.00 and an expiration date a couple of months out for about
$2.00 per contract, at the present price. If the price of the QQQQ rises by 1%
your call option may increase in price by 15-20%. If you are correct in the
market direction your profit is potentially unlimited. The more the underlying
stock rises (in our example QQQQ) before an expiration, the bigger your profit.
On the other hand, your risk is remains limited. The most you can lose is the
price that you paid for the option, and from the example above that would be $2.00 per contract.
Generally it is recommended that traders purchase calls that are at-the-money or
in-the-money, because this lowers the risk of losing the premium, when they are
purchased. Even though the out-of-the-money options are much cheaper and provide
greater leverage, they are considered more risky.
When you buy call options you cannot hold them as stocks. Options loose their
value with time - the closer they are to the expiration the cheaper they become.
When a trader initiates the position, it is important to set a specific target
price for the option and it is a good strategy to sell and take profits, when
the price reaches the target. As the price is rising, be careful that greed does
not become a too strong a motivator and make you want to increase your price
target. Doing this, a trader can sometimes turn a winning position into a losing
position.
It is important to analyze your expectations for the market and for the
underlying asset before selecting your strategy.
One single winning trade
could pay for the membership for years to come. DISCLAIMER: THIS INFORMATION IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE ANY FINANCIAL ADVICE. RISK IS INVOLVED IN ALL STYLES OF MONEY MANAGEMENT. Uncovered options trading involves greater risk than stock trading. You absolutely must make your own decisions before acting on any information obtained from this Website. The return results represented on the web site are based on the premium received for the selling options short and do not reflect margin. It is recommended to contact your broker about margin requirements on uncovered options trading before using any information on this web site. Use our " Trade Calculator" to recalculate our past performance in relation to the margin requirements, brokerage commissions and other trading related expenses. Past performance is not indicative of future results.
| 
