| Investing in the stock market can be particularly tricky. | | | | strategy. If the share price rises to $50 a share within |
| One part of the stock market that many individual | | | | three months, then you have the right to buy it at only |
| investors seem to have a great deal of trouble | | | | $35... at which time you could turn around and sell it on |
| understanding is the options market. Many people find | | | | the major stock market and pocket the $15 difference |
| options trading to be incredibly complicated, but the | | | | as your profit. |
| fact of the matter is... it can be quite easy once you | | | | The price of purchasing that option, which is known as |
| get to know it and understand its workings. | | | | a premium, may be just.50 cents. That.50 represents |
| In this article I want to discuss some of the basics of | | | | basically the time value of the option and it is usually |
| stock options as far as the mechanics of call options | | | | based on the length of time before the option expires |
| go. That is I want to talk about what call options are | | | | as well as sometimes the likelihood of the stock |
| and how you can profit from them. | | | | actually reaching that specific option price. |
| There are basically two types of stock options. The | | | | If most investors think that there is a very large |
| first kind is called a "call" option. A call option gives you | | | | chance that the stock will reach $35 a share, then the |
| the right to buy a security at a set price sometime in | | | | price of that option is going to be much higher. |
| the future. The second kind of option is called a "put" | | | | The risk involved in purchasing this type of option is |
| option. A put option gives you the right to sell a security | | | | also easily understandable. If the price of the share |
| at a set price sometime in the future. | | | | doesn't rise to $35 a share, then your option will expire |
| I think most of your average investors understand that | | | | and be completely worthless. So what is your risk? |
| concept fairly easily, but when you get into more | | | | Well, it's easy... you risk that $.50 or whatever it cost |
| specifics things start to get a little confusing and that's | | | | you to buy the option and you'll lose that money if the |
| a shame because it's not that much more complicated | | | | share price doesn't rise above $35 a share. |
| than what I just said above. | | | | Now imagine that the shares have risen in price to $45 |
| I think the best way to explain is to simply give you an | | | | per share. Your call option is now worth $10. How did I |
| example. Imagine a company's stock sells for $30 a | | | | figure that? It's easy, you have the right to buy the |
| share. You want to buy a call option that expires in | | | | share at $35 a share and you can sell that same |
| three months giving you the right to buy one share of | | | | share on the market for $45 a share. $45 minus $35 |
| stock in the company for $35. What this means is that | | | | equals $10 which is what your option is now valued at. |
| anytime in the next three months you have the option | | | | Think about it; that option that you bought for $.50 is |
| to buy a share of stock for only $35 no matter how | | | | now worth $10! |
| high the share price has risen too. It's easy to | | | | Pretty easy huh? Yes it is. Investing in call options |
| understand how you would make money on such a | | | | doesn't have to be any more difficult than that. |