Call Options by BetterTrades

One of the basics of buying and selling options taught by BetterTrades is how to incorporate the use of call options in your trading plan. This is one of the basic steps toward making money and is a cornerstone of the BetterTrades program. Once a student learns the concept behind call options, the idea of becoming profitable in the market becomes much simpler to understand.

A call option gives the buyer the right, but not the obligation, to buy a stock or index for a specific price (called the strike price) on a specific date (called the expiration date). At the end of the predetermined time period, the option will expire worthless, which means a trader using them must take action in a timely manner or risk losing their stake in the trade.

A BetterTrades student who believes a stock (or any underlying asset) is going to increase in price will purchase a call option; a person who believes a stock is going to lose value will purchase a put option. Unlike stocks, which may be purchased in individual shares, options are sold in contracts, which allow the trader to control 100 shares of the stock for a small percentage of the stock price. A trader who buys 10 contracts on XYZ stock thus controls 1000 shares of that stock.

There are differences between buying stocks and buying options, but the basic premise remains the same: When a stock goes up, anyone holding a call option will see their position improved as well. But why buy options when you can buy the stock? After all, an option has a specific shelf life and will expire if it isn't acted up. Stock purchases are indeed fine investments, but many of today's best stocks are almost unaffordable. It would be almost impossible for an average investor to buy enough shares of a stock like Google, which trades around the $400 level. Not many people have the $40,000 sitting around that would be required to buy just 100 shares of Google. But it is possible to buy a call option on Google for a much smaller investment and leverage those shares into a profit.

When buying a stock, a BetterTrades student receives a penny-for-penny return for their money; if the stock goes up 10 cents, they receive a 10-cent per-share profit. Options work a little different, as each option is assigned a Delta, which is the relationship between the movement of the stock and the movement of the option. When the stock moves a dollar, the Delta tells you how much the option will change in relation to the move. For example, if the underlying stock moves up $1 and the option has a Delta of 70, your option would increase 70 cents.

The price at which you buy the call option is called the premium. This is the cost you are willing to pay in order to hold your option and is the only money you have at risk in the trade. If the stock goes up in value, your stock's intrinsic value will increase and you will make a profit. If the stock's price goes down, your intrinsic value will decrease and you will have a loss.

One source to find options to purchase is The Dedicated Trader, a product created by BetterTrades to help students find the option that meets all the company's guidelines. Doing so will keep you safer and perhaps more profitable.