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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

May 28, 2015

How to Make 80% a Year With Long-Term Option Bets

One of my favorite options plays is a long-term bet that a particular stock will be equal to or higher than it is today at some future date. Right now might be a perfect time to make that kind of a bet with one of my favorite stocks, Apple (AAPL).

Each January, I pick several stocks I feel really positive about and buy a spread that will make an extraordinary gain if the stock is flat or any higher when the options expire one year out. Today I would like to tell you about one of these spreads we placed in one of the Terry’s Tips portfolios we carry out, and how you can place a similar spread right now. If AAPL is only slightly higher than it is today a year from now, you would make 100% on your investment.

Terry

How to Make 80% a Year With Long-Term Option Bets

I totally understand that it may seem preposterous to think that over the long run, 80% a year is a possible expectation to have for a stock market investment. But if the AAPL fluctuates in the future as it has in the past, it will absolutely come about. It can be done with a simple option spread that can be placed right now,

May 14, 2015

How to Make Gains in a Down Market With Calendar Spreads

This week I came to the conclusion that the market may be in for some trouble over the next few months (or longer). I am not expecting a crash of any sort, but I think it is highly unlikely that we will see a large upward move anytime soon.

Today, I would like to share my thinking on the market’s direction, and talk a little about how you can use calendar spreads to benefit when the market (for most stocks) doesn’t do much of anything (or goes down moderately).

Terry

How to Make Gains in a Down Market With Calendar Spreads

For several reasons, the bull market we have enjoyed for the last few years seems to be petering out. First, as Janet Yellen and . . .

April 29, 2015

Check Out a Long-Term Bet on FaceBook (FB)

In the family charitable trust I set up many years ago, I trade options to maximize the amounts I can give away each year. In this portfolio, I prefer not to actively trade short-term options, but each year, I make selected bets on companies I feel good about and I expect they won’t tank in price over the long run. Last week, I made such a bet on FaceBook (FB) that I would like to tell you about today. The spread will make over 40% in the next 8 months even if the stock were to fall $5 over that time.

Terry

Check Out a Long-Term Bet on FaceBook (FB)

When most people think about trading options, they are thinking short-term. If they are buying calls in hopes that the stock will skyrocket, they usually by the cheapest call they can find. These are the ones which return the greatest percentage gain , , ,

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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