Call Option Definition: Ultimate Guide for Learning to Trade Options

Ultimate Guide for Learning to Trade Options

Kunal gets asked all the time if we teach options trading strategies. To satisfy the ever-growing demand, Kunal finally recently asked me to teach Options strategies I use every day to grow my trading account. I’m going to do a series over the next week going over basic options terminology to get everyone started and build foundation knowledge about options trading! If you are interested in learning proven options trading strategies, you should check out my upcoming live 6-day live trading bootcamp.

What is a Call Option?

A call option is a contract that gives the buyer the right (but an obligation) to buy a stock at a price, known as the strike price, on or before when the contract expires, which is also known as the expiration date. An options contract market looks just like the stock market: There is a market of buyers and sellers for options contracts, and these prices will fluctuate. The goal with a call option contract is simply to buy it low and sell it high! Options contracts are deravitive instruments, meaning their price is derived from the price of a stock. You still need to understand how to read stock trends to buy and sell options correctly. When you are holding a call option, you need to pay attention to all the same events as a stock shareholder. Be aware of earnings calls, drug trial results, and other major events that are likely to bring in volatility to the stock, and as a result bring even more volatility into your contract pricing.

Call Option Example

Let’s say you wanted to pay a call option for Apple stock. Apple is currently trading at $170 per share and is currently February 12th, 2019. I will go into the options market and buy a contract that will give me that right to buy 100 shares of Apple stock at $180 on or before May 17th. There are many expiration dates and strike prices for traders to choose from, but we will use this contract simply as an example. As the value of Apple stock appreciates, the price of my option contract goes up, and vice versa. I may hold the contract until the expiration date, at which point they can take delivery of the 100 shares of stock or sell the options contract at any point before the expiration date at the market price of the contract at that time. (we will explain expiration prices in more detail in tomorrow’s article)

Why Use Call Options

Now that you have an idea of what a call option is, you are probably wondering, why would someone use one to bet on the price of a stock instead of just buying the stock itself. One of the primary reasons people use options is contracts is because they tie up less capital than buying the stock itself, and there is more potential upside. If you get in and out of the contracts at the right time, you have the opportunity to make massive returns in a very short period of time. Because of the higher volatility in the options market (and no pattern-day-trading rule), it is easier to turn small amounts of capital into larger sums than trading stocks if done correctly. They are also a great way of hedging risk. ]]>

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Call Option Definition: Ultimate Guide for Learning to Trade Options