How to Buy Open Stock Options

Learning how to trade options can be confusing. An option to buy is the right, but not the obligation, to purchase a stock at a certain price in the future. An option to sell is the right, but not the obligation, to sell a stock at a certain price in the future. The price in the future is called the strike price. The more volatility (fluctuations in price) a stock has, the higher the options are priced in value.

Instructions

1. Understand the terminology. If you "write" an option, you are selling a right for a premium. That is, you are selling someone else the right to buy or sell your stock at a predefined price in exchange for a fee.

   Also review open and close trading terminology. When you enter a trade you are opening a position. When you exit a trade you are closing a position. Buying an open stock option is another way to say, buying options.

2. Contact your broker or open an account with an online broker. Make sure the broker deals in options. You will need to know your ticker (which will tell you the timing and expiration date on the option) and the strike price. Walk through a few virtual trades before making your first trade. If you are unsure about what to buy, ask your broker for research on options strategies over the next six months.

3. Determine if you want to buy puts or calls. If you believe a stock is going down, you can buy puts. If you believe the stock is going, up buy calls.

4. Make a "buy to open" order. When you enter a trade, you are essentially opening a position, hence the orders "sell to open" and "buy to open." If you are buying an option, either a put or a call, you must enter a "buy to open" order. If you are writing an option, also referred to as selling an option, you must enter a "sell to open" order.

References

• Investopedia: Options university