When you purchase a CALL OPTION, you have...
THE RIGHT, BUT NOT THE OBLIGATION, TO BUY A FIXED NUMBER OF SHARES AT A FIXED PRICE ON OR BEFORE A FIXED DATE.
Stock Option Glossary:
STRIKE PRICE This is the fixed, pre determined price at which you can buy the shares. This cannot be changed throughout the life of the option.
EXPIRY This is the date at which the option contract expires. This cannot be changed throughout the life of the option, and there after the contract is worthless.
EXERCISE The process of fulfilling the put option contract and buying the shares. This can be done any time up to and including the option expiry date.
PREMIUM The amount you pay for the option contract. Each stock has set strike prices for trading. Depending on where the strike price is in relation to the current share price, influences the amount you pay.
In the U.S one option contract relates to 100 shares and on the Australian stock market it would relate to 1,000 shares. Options give you control over these shares at a fraction of the cost of buying the stock itself.
For example, XYZ stock might cost you $ 15.00 to buy, whereas $ 1.50 might buy you an XYZ call option that would give you control over that stock.
SO HOW DO YOU PROFIT FROM CALL OPTIONS?
You would buy Call Options if you had a bullish view on a particular stock, as they give you the right to buy shares.
The value of a call option increases as the share price rises. You stand to profit if the share price goes up.
Call Options can be used many ways...
As an Incentive:
Many business owners commonly give their employees call options over the company they work for as part of their employment agreement or as an incentive. The idea being that as the stock price increases, so does the value of the call option, allowing the employee to on-sell the option at a profit, or exercise their right to purchase the stock at the lesser strike price resulting in a profit. However if the stock price has not increased then the option will expire worthless.
As Income:
Stock Options allow you to make money in the stock market, whether it's up or down. There are countless different options trading strategies all with their own degree of risk, that may help earn you an income.
A common, but powerful income strategy is to trade Call Options for profit in a rising market. This is the process of buying and selling call options (before they expire) at a profit.
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