Buying a Call Option

Buying a Call Option

How to buy option

However, a put option also gives you exposure to 100 shares, only for much less. Our dedicated Trader Service Team includes many former floor traders and Futures Specialists who share your passion for options trading. Whether you’re in-the-money, or out-of-the-money, we’ll help you keep on top of your money with intuitive tools for trading options on stocks, indexes, and futures. This material is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. Additional information is available in our Client Relationship Summary (Form CRS) (PDF).

There are also exotic options, which are exotic because there might be a variation on the payoff profiles from the plain vanilla options. Or they can become totally different products all together with “optionality” embedded in them. For example, binary options have a simple payoff structure that is determined if the payoff event happens regardless of the degree.

Writing Covered Calls

Your broker will want to make sure you have enough equity in your account to buy the stock, if it’s put to you. Many traders will hold enough cash or margin in their account to purchase the stock, if the put finishes in the money. However, it’s possible to close out the options position before expiration and take the net loss without having to buy the stock directly. In this strategy, the trader buys a call — referred to as “going long” a call — and expects the stock price to exceed the strike price by expiration. The upside on this trade is uncapped and traders can earn many times their initial investment if the stock soars. However, this example implies the trader does not expect BP to move above $46 or significantly below $44 over the next month.

A financial advisor could help you answer questions about put option investments and create a financial plan for your needs and goals. Opposite to call options, a put gives the holder the right, but not the obligation, to instead sell the underlying stock at the strike price on or before expiration. A long put, therefore, is a short position in the underlying security, since the put gains value as the underlying’s price falls (they have a negative delta).

Leverage and Risk

If you bought ABC stock at $50 but were worried about the stock’s price going down, you might purchase a put option with a strike price of $50 that expires in six months at $1 per share. If the stock drops to $45 per share and you exercise your option, you’d be out your $100 premium, but you’d still have $4,900 rather than 100 shares of ABC stock worth only $4,500. A put option allows investors to bet against the future of a company or index. More specifically, it gives the owner of an option contract the ability to sell at a specified price any time before a certain date. Put options are a great way to hedge against market declines, but they, like all investments, come with a bit of risk. For starters, you can lose not only what you invested, but also any chance for profits.

When the stock price underlying your option changes, it can make it worth more, and you can sell an option without exercising it. For instance, if the stock price moves above the strike price on a call option you bought, your option is now more valuable. You have the right to buy the stock at a lower price than it’s currently trading at, so you can exercise the option, sell the stock, and pocket a nice profit. If QRS’s stock price does not decrease to the put options’ strike price of $420, the put options will not be exercised, so the investor will not be able to buy the underlying stock.

Call Option Example

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  • Its Web site, , features a learning center with in-depth information about options investing.
  • These materials are made available on an “as is” basis, without representation or warranty.
  • The maximum risk of buying $5,000 worth of shares is theoretically the entire $5,000, because, while it is unlikely, the stock could go to zero.
  • To start trading options, you’ll need to find a broker that offers options trading and then enable that feature on your account.

To start trading options, you’ll need to find a broker that offers options trading and then enable that feature on your account. The downside on a long put is capped at the premium paid, $100 here. If the stock closes above the strike price at expiration of the option, the put expires worthless and you’ll lose your investment. The table shows that the cost of protection increases with the level thereof.

Covered call

But there’s a way to buy shares without paying that market price by using stock options. Understanding and knowing how to buy options can give you another tool for your investing toolbox. The majority of the time, holders choose to take their profits by trading out (closing out) their position. This means that option holders sell their options in the market, and writers buy their positions back to close.

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In this sense, the call options provide the investor with a way to leverage their position by increasing their buying power. On the other hand, if that same investor already has exposure to that same company and wants to reduce that exposure, they could hedge their risk by selling put options against that company. Suppose a trader wants to invest $5,000 in Apple (AAPL), trading at around $165 per share. Suppose then that the price of the stock increases by 10% to $181.50 over the next month. Ignoring any brokerage commission or transaction fees, the trader’s portfolio will rise to $5,445, leaving the trader with a net dollar return of $495, or 10% on the capital invested.

However, selling an option without any underlying asset, also known as a naked call or a naked put, has a similar loss potential as selling short (infinite). Of course, if the price of ABC goes up instead of down, you’re out the $100 with nothing to show for it. You’d be better off selling on the exchange rather than selling at your now-lower strike price, so your put is worthless. But just like with insurance, you usually buy a put hoping not to use it. The buyer pays a premium for the option regardless of whether they actually buy the asset. This is a win for the buyer, who gets the asset at a price they like, and the seller, who makes money on the deal regardless of whether or not they sell.

How to buy option

Sometimes, options that are in the money will be shaded in a different color to distinguish them from options that are out of the money—the strike price is higher than the current stock price. Call or put options contracts are typically issued in increments of 100 shares. So in the ABC and XYZ examples, the call option buyer and put option buyer each would pay $100 to the option seller. The premium is the maximum an option buyer can lose if the option expires. It’s important to understand that as the seller of an option, your risk is potentially unlimited if you sell a call, and potentially very large if you sell a put. As a buyer, your risk is that your option expires with no value, and you lose the entire premium you paid with nothing to show for it.

There are two main types of written call options, naked and covered. These unique Investment Kits harness the power of artificial intelligence to sift through market data to find the most promising assets in a category of your choosing.’s Investment Kits take the headache out of selecting and monitoring investments. Boxes are another example of using options in this way to create a synthetic loan, an options spread that effectively behave like a zero-coupon bond until it expires.

How to buy option

Research multiple brokerages to better understand the services offered by each. Online reviews may have information to consider if you can’t get a personal recommendation. You’ll then use your brokerage’s trading platform to buy the options contracts you’ve chosen. Go through any resources available on your broker’s website to ensure you’re doing everything right. Zero trading commissions are just the tip of the iceberg when choosing an options brokerage. Consider other hidden fees, including data fees and platform fees.

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Options on futures offer nearly 24-hour access6 to react around potentially market moving economic events. Hedge existing futures positions, earn premium or speculate while using less money upfront. Watch tutorial videos, take lessons, download books and track the world news. If you’re a rookie trader, seek guidance from an experienced trader or mentor as you learn how to buy put options. Chances are you can find one that aligns with your own analysis of the stock or asset in question. If you aren’t sure what trading level you’d meet or how much risk you’re willing to take on, it may be time to talk to a financial professional.

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