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Call Options

Buying a call option gives you the right (but not the obligation) to purchase 100 shares of a company’s stock at a certain price (called the strike price) from the date you buy the call until the third Friday of a specific month (called the expiration date).

People buy calls because they hope the stock will go up, and they will make a profit, either by selling the calls at a higher price, or by exercising their option (i.e., buying the shares at the strike price when the market price is higher).

Call options are quoted in dollar terms (e.g., $3.50), but they actually cost 100 times the quoted amount (e.g., $350), plus an average of $1.50 commission (charged by my discount broker — commissions charged by other brokers may differ).

Since most stock markets go up over time, and most people invest in stock because they hope prices will rise, there is more interest and activity in call options than there is in put options.

Real World Example of Call Options

Here are some call option prices for a hypothetical XYZ company on November 1, 2010 (price of stock: $45.00):

Expiration Date
Strike Price Nov '10 Dec '10 Jan '12 Terminology of Option
(price of call option)
40 $5.50 $7.00 $18.50 "in-the-money"
(strike price is less than stock price)
45 $2.00 $4.00 $16.00 "at-the-money"
(strike price is equal to stock price)
50 $0.50 $1.00 $14.00 "out-of-the-money"
(strike price is greater than stock price)

The premium is the price a call option buyer pays for the right to be able to buy 100 shares of a stock without actually having to shell out the money the stock would cost. The greater the time period of the option, the greater the premium.

The premium (same as the price) of an in-the-money call is composed of the intrinsic value and the time premium. (I understand that this is confusing. For in-the-money options, the option price, or premium, has a component part that is called the time premium). The intrinsic value is the difference between the stock price and the strike price. Any additional value in the option price is called the time premium. In the above example, the Dec ‘10 40 call is trading at $7.00. The intrinsic value is $5 ($45 stock price less 40 strike price), and the time premium is $2.

Terry's Tips Stock Options Trading Blog

October 14, 2019

Salesforce.com (CRM) Offers Value After the Correction

Salesforce.com’s stock price has corrected lower for the past few months which seems to offer value when considering where analyst price targets are set. Take a look at the following article which discusses an average target of $186.97 - Investors Jump Off The Fence: salesforce.com, inc., (NYSE: CRM). Also, Jeffries recently reiterated their buy call with a target of $171. Although a bit conservative compared to the average, it still represents potential for a 14% rally.

October 7, 2019

Copart (CPRT) Is a Buy on Dips

Recent news articles on Copart suggest the stock is well positioned for further gains. Check out these two articles for the reasoning behind the sentiment - Why Copart (CPRT) Stock Might be a Great Pick and Is Copart (CPRT) a Great Growth Stock?

September 30, 2019

Lululemon Athletica Nears Major Technical Support Area

Lululemon Athletica’s reported earnings in early September which led to a rally to fresh all-time highs. Several analysts are expecting more upside, here are two of them - Is Lululemon (LULU) a Solid Growth Stock? 3 Reasons to Think " Yes " and UBS Group Analysts Give Lululemon Athletica (NASDAQ:LULU) a $210.00 Price Target.

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TD Ameritrade

This Chicago brokerage firm with the unlikely name thinkorswim, Inc. by TD Ameritrade is considered by many to be the best option-friendly broker. For openers, they have extremely good analytic software and their option trading platform is exceptional. Thinkorswim Mobile has been called the best mobile app in the industry. In 2017, TD Ameritrade received 4 stars out of 5 in the annual Barron`s* Best Online Brokers Survey. TD Ameritrade was tops as an online broker for long-term investors and for novices. The company is the only broker that receives the highest 5.0 score for research amenities among all firms participated in the ranking last year.

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Options are not suitable for all investors as the special risks inherent to options trading my expose investors to potentially rapid and substantial losses. Please read Characteristics and Risks of Standardized Options before investing in options

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