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Call Options: The Most Basic of All Options Strategies
Buying a call option is ground zero in the options
market. Everything flows from here.
So what is a call option?
It is nothing more than a bet that a stock is
going to increase in price.
A call option can be a very profitable play since it usually costs just
a small fraction of actually buying the stock.
But first this -- if you don't know yet options are perhaps the most
versatile tool in all of the investment world.
You can use call options to
make very simple but profitable trades.
In the end buying and selling call options is no more
complex than buying and selling stocks.
When you buy an call option you are
in effect renting the profit right to a stock for a limited amount of time.
It's like renting a house in that sense. You get full use of it.
During that "rental" time you get all of the stock`s potential profits except
dividends.
The Nuts and Bolts
Instead of paying $35, $78, $112 or more for a single share of stock,
you can use call options to control 100 shares of stock for as little as
$25. That's quite a bargain!
But millions of other traders also know the benefits of buying options,
and as a result many times the prices of options become overvalued.
To be successful you must find options that are cheap and underpriced,
and also make sure that you buy them for an undervalued price.
Entering Orders
When you buy options always use a limit order, good for the day only. A
limit order requires that you get your price or your trade won't be
made.
Don't use a market order, which executes your trade at whatever the ask
price is when your order makes it to the floor of the exchange.
Option prices can change quickly and a market order could cause you to
pay more than you thought you were.
Sometimes it may take four or five tries before you get an order
executed. For example, Ultimate Option Strategies editor Ken Trester
likes to tell of a time when he was trying to buy a Jan 15 Call when the
stock was at 14.5.
The bid-asked prices were .12 point - .31 point. Ken never initially
pays the ask price; he always tries to get a better price. So he entered
a limit order to buy the option at .18, just .06 of a point above the
bid price.
Three hours later he got the order filled at .18 ($18), which is a lot
cheaper than .31 ($31).
The lesson here is that sometimes it pays to try to get a price between
the bid and ask prices.
A limit order helps you do that; a market order does not.
The key to success in the options game is price. Unless you know if an
option is truly a bargain you cannot win! Bargain hunters who consider
price first and foremost are the ones who consistently win the options
game.
Options market professionals ALWAYS use pricing formulas. They're
constantly on the lookout for underpriced options.
So it makes sense that YOU need an options pricing formula that gives
you that insider's edge, such as the one we use in The
Complete Option Report.
