How to Buy a Call Option for Profit

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By pfincome
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Buy a Call Option for Profit

Options are a powerful way to increase the value of your portfolio while increasing your income and monthly cash flow. If used correctly, trading options can make you enormous profits. Conversely, if you are not disciplined with your trading, stock options can wipe out your earnings very quickly. One of the easiest and least risky option tools available are selling call options. Most experts view a call option as a strategy that provides virtually unlimited profit potential with limited calculated risk. Typically, to avoid risk, a call option should be used when we are in an up trending market and the outlook of the particular asset is bullish. However, if you can handle the risk, trading options in a down market can make you a bundle of money as well.

Difficulty: Moderate

Instructions

Things You'll Need:

Stock Broker
Computer
Internet Access

Step 1

The first step in purchasing a call option is to identify the asset(s) or stock(s) that you are interested in trading. I find it very helpful to stick to trading options of the stocks and companies that you know or are interested in. I prefer to stick with stocks that pay good dividends and have been around for a while. The riskier the stock, the more volatile the associated options are.
Step 2

After figuring out what stock(s) you want to trade call options for, you need to define your strategy. You can choose to trade options for the short-term and flip these contracts similar to day-trading stocks. Or you can choose a longer-term approach. I prefer to purchase call option contracts that have a 4 – 6 month window for expiration. Extending contracts out several months gives you a lot of time and flexibility when trading options, which is why I prefer this approach. If you want to take a short-term trading approach, then look for available contracts for the current month out to 3 months. Remember, the further out you look for contracts, the greater the premium you will pay for the right to own the stock.
Step 3

Once you have your strategy defined, you need to determine which strike price you want to purchase. Depending on the stock, there are usually several strike prices available for every month the call option is available. I prefer to purchase deep in the money call options. This means that if a stock is trading at $20, you may look for a strike price of $10. There is a higher premium required for this stock, but the volatility is much less than purchasing a option with a $20 strike price for the same asset.
Step 4

Once you have made your decision on what to purchase, you simply contact your broker to make purchase the asset. Remember that if you purchase 1 call option contract for $10 - that means that you have purchased the right to buy 100 shares of that stock at a future date for $10.
Step 5

After you made your purchase you have two choices. You can hold the call contract(s) so you own the right to buy 100 shares of the stock for the strike price. The other possibility is to turn around and sell that same contract(s) to someone else, hopefully for more than what you originally paid for it. This is my preferred method of options trading as I don't have the capital to purchase 100 shares of stock for $10. Instead, I am concerned with trading the price of the call option.