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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 24, 2014

A Little About Vertical Spreads

Today we will discuss vertical spreads, and how you can use them when you have a strong feeling about which way a stock is headed.

But first, a brief plug for my step-daughter’s new fitness invention called the Da Vinci BodyBoard – it gives you a full body workout in only 20 minutes a day right in your home. She has launched a KickStarter campaign to get financing and offer it to the world – check it out: https://www.kickstarter.com/projects/412276080/da-vinci-bodyboard

Terry

A Little About Vertical Spreads

Vertical spreads are known as directional spreads. When you place such a spread, you are betting that the stock will move in a particular direction, either up or down. If you are right, you can make a nice gain. Even better, you can usually create a vertical spread that also makes money if the stock doesn’t move in the direction you hoped, but stays absolutely flat instead.

October 17, 2014

Knowing When to Bite the Bullet

Sometimes, the market does just the opposite of what you hoped it would, and you are faced with the decision to hang on and hope it will reverse itself, or accept that you guessed wrong, and close out your position and move on to something else.

That will be our subject today.

Terry

Knowing When to Bite the Bullet

Kenny Rogers said it well – “You’ve got to know when to walk away and know when to run.” We set up demonstration portfolio to trade diagonal spreads on an ETP called SVXY. We were betting that the stock would go up. In each of the last two years, SVXY had doubled in value. Its inverse, VXX, had fallen from a split-adjusted $3000+ to under $30 over the past 5 years, making it just about the biggest dog on the entire stock exchange (selling it short would have made anyone a bundle over that time period). We felt comfortable being long (i.e., the equivalent of owning stock) in something that would do just the opposite of VXX.

In our demonstration portfolio, we decided to . . .

October 10, 2014

Handling an Adverse Price Change

Our SVXY demonstration hit a real snag this week, as the volatility index (VIX) soared to over 20 and SVXY got hammered, falling from the mid-$80’s level when we started the portfolio to about $65 while we were betting that it would move higher.

I hope you find this ongoing demonstration of a simple options strategy designed to earn 3% a week to be a simple way to learn a whole lot about trading options.

Terry

Handling an Adverse Price Change

There wasn’t much we could do today. The short 80.5 SVXY put that we had sold was . . .

Making 36%

Making 36% – A Duffer's Guide to Breaking Par in the Market Every Year in Good Years and Bad

This book may not improve your golf game, but it might change your financial situation so that you will have more time for the greens and fairways (and sometimes the woods).

Learn why Dr. Allen believes that the 10K Strategy is less risky than owning stocks or mutual funds, and why it is especially appropriate for your IRA.

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