Trading Options Online, Buying Call Options

When people begin trading options online their intention is to make a lot of money. Buying calls is one of the favorite strategies of options speculators and with good reason. For literally a fraction of what it cost to buy stocks, you can leverage a small investment to double triple or quadruple. This is what attracts most people to the options market.

Finding a profitable call option takes a measure of skill understanding and knowledge of how options are priced. Let’s get into some basic explanations and definitions. Who knows you may be ready to buy call options very soon.

As we have stated and as we will repeat an option contract gives the owner the right to buy the underlying stock or security at a specified price, its strike price for a fixed period of time. In other words until its expiration. You have the right, but are not required, to buy the stock at a price listed in your options contract. Remember you have the right but are not under any obligation to do so. For this right you pay a premium to the seller for the rights to controlling the stock. You are in control of the stock when you buy call options.

Obviously buying calls is a strategy that is used by traders to increase income. Generally when you buy a call option it means you are bullish on the market, the index, or the underlying stock. You are hopeful that a particular stock or security will rise in value quickly so that you can take your profits and move on in the shortest amount of time.

How do you make money when you buy calls? There are essentially a number of ways this works when you buy call options. First you can buy the call with the plan to eventually buy the underlying stock, this is called exercising your option. You can also, after buying the call sell the option for profit. Most traders have no interest in buying the stock and look to profit from selling their options. Obviously selling their options at higher price than what they pay. And finally if the stock does not work out you can allow the option to expire worthless or perhaps sell the option for a minimal loss.

There are a number of advantages to buying calls. One of the most attractive advantages of buying calls is the low-cost. A stock valued at $25 a share may not be affordable for everyone, but a call contract is only one dollar. You get to participate in the movement of the stock without having to purchase it outright. Buying call options also allows investors to be involved with pricier shares of stock. A $300 stock is very expensive, even if you only buy 100 shares. Options allow you to participate in the stock for a fraction of that cost.

Call options give you the advantage of leverage, and that may be the most significant advantage call options have for individual investors. Because of the smaller investments in particular issues, there is less risk because you are investing less. If buying call options sounds too good to be true, remember it still takes skill to develop a trading strategy and execute the strategy on a day-to-day basis. Call options also allow individual investors to diversify a portfolio that they may otherwise not be able to accomplish. Call options can be an inexpensive method of adding to your position without disrupting your diversification principles.

We will stress again and again the necessity of educating yourself before you begin trading options online. If it was easy everyone would be doing it with success. It is not easy, however, it is easier with knowledge. Paper trading with options should be a first order of your education process. Once you establish a strategy for choosing options and underlying stocks you can trade real money. However, until then, unless you just have more money than you know what to do with, try paper trading options first.