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Abstract

This is where options can come in.You can essentially assume (potential) control over 100 shares of a stock by purchasing (buying, going long) a call option. When you’re long a call, you think the underlying stock will move higher (you’re bullish). Ownership of the long call option contract gives you the right — not an obligation — to purchase the underlying stock at a particular price within a defined period of time.Consider a $10 call option that expires in June 2021. It trades for$ 0.40.It would cost you $40 to buy one of these call options. Let’s say the underlying stock trades for$ 9.00 when you purchase the call for $0.40 (100 X$ 0.40 = $40). Theoretically, as the stock increases in price, so does the call option premium (we refer to the market price of an option as the “premium”). The inverse tends to hold true.Other factors impact the premium, including how close you are to the option expiration date — in this case, June 2021. We’ll save this concept — time decay — for another day. I don’t advise doing anything with options until you understand the ins and outs of how they work, specifically time decay. It’s best to start with the basics we present here before moving forward. It’s like learning a language. You’re not going to speak it in public settings until you establish a proper foundation.You’re likely going to do one of two things as your trade takes shape.If the underlying stock trades to$ 10 or higher prior or up until the option expiration date, you can exercise your option and buy the stock for $10, even if it’s trading higher. You’ll need cash (or buying power) in your account to cover the cost of 100 shares at the$ 10 strike price. So $1,000.Let’s say the stock drops. If this happens, your option premium will — generally speaking — do the same. As you near option expiration day, it’ll be close to, if not worthless. When an option expires worthless, you only lose the$ 40 you paid for the call in the first place. This is your maximum loss on this type of trade.At least in my experience, here’s what’s more likely to happen.As the underlying stock trades higher, the value of your option premium increases. You can close your long call and make a profit on the premium’s upside. So you’re not concerned with owning the stock. You just want to profit from upside in the option premium, as it rises along with the underlying stock.To illustrate, I recently blew what would have been a profitable option trade.I <a href=

Options

"https://readmedium.com/i-basically-took-1-500-and-set-it-on-fire-79f7ae5b95a9">prematurely sold</a> Ford calls I had purchased for about $0.65. After I closed the position, Ford stock went on a massive run. The call options I had already sold ran to about$ 2.25. I missed out on $160 in profit per contract on a position size of 10 calls.To make this more relatable, think about dating and relationships.You’re not going to go the distance with most people you date. Instead, you’ll see them once, twice, or for a few months, then you’ll decide not to exercise your option to buy the stock. You’re more likely to close out the position (sell the premium) taking a loss or pocketing a gain (you break up in a not so good way or amicably). In some instances, the position will expire worthless. You feel like you wasted time in the relationship and lost a little of yourself in the process.If you’ve found a keeper, you’re going to ride the stock’s upside, then exercise your option, purchasing shares of the underlying stock. You buy them at a discount to the market price and hold onto them — tightly — forever.Aw, so sweet.Put another way, most options trades you make will be short-term in nature. You’ll sell the premium — hopefully for a gain — or let it expire worthless. Once in a while, you’re so in love with the underlying stock you want to ask it to go the distance with you (exercise the option = beginning a long-term relationship or taking your existing relationship to the next level).It took me a long time to really understand how options work. Calls took me some time, but in due process even intermediate and advanced strategies started to come into view. Now I use long calls and covered calls to juice my portfolio a bit here and there. I only dabble in the more advanced stuff.As with the relationship analogy, it’s best to not rush things. Or maybe you’ll feel certain and secure and want to dive in more quickly. It’s gotta feel right.Either way, flipping to the language analogy, be sure you’re super confident about the mechanics of options before you put them into real-life situations. It’s always a good idea to trade in a virtual or simulated account before moving onto trading with real money.This article is for informational and entertainment purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.</article></body>

Using Love and Relationships to Understand Call Options

After you read this article, you’ll know exactly how the most basic stock options contracts function

If you’re like a lot of people, you have difficulty wrapping your head around the way options contracts work, particularly long call options.

That confusion ends today — with this article. (If I do my freaking job!).

I reckon I’ve found the perfect analogy to help you make sense of the basic options strategies most investors start out with. This is important because, as you get your personal finance ducks in a row and start investing, you might want to use options as a way to generate income or amp up your portfolio’s returns. I went on this trajectory. And I know others who have as well.

You’ll never get there if you don’t understand call options.

Here’s how it’ll go down.

I’ll provide a quick explanation of how long call options work with examples. Then, I’ll present my analogy, which should make the function of a long call relatable.

Confused?

Good.

It’ll be pretty cool when you’re no longer confused at the end of this article, even if you’re confused along the way. If you’re still confused, that’s fine too. These concepts can take a while to grasp. The more you read about and visualize them, the closer you’ll get to mastery.

You go to your online brokerage account, log-in, execute a few clicks, and you can be the proud owner of 100 shares of a stock. You have direct ownership. Generally speaking, your shares give you proportional shareholder voting rights and access to dividends, assuming a company pays a dividend.

This is how I do a majority of my stock market investing, though I often buy far fewer than 100 shares. You don’t have to participate in the movement of a stock this way. Sometimes, I don’t. This is where options can come in.

You can essentially assume (potential) control over 100 shares of a stock by purchasing (buying, going long) a call option. When you’re long a call, you think the underlying stock will move higher (you’re bullish). Ownership of the long call option contract gives you the right — not an obligation — to purchase the underlying stock at a particular price within a defined period of time.

Consider a $10 call option that expires in June 2021. It trades for $0.40.

It would cost you $40 to buy one of these call options. Let’s say the underlying stock trades for $9.00 when you purchase the call for $0.40 (100 X $0.40 = $40). Theoretically, as the stock increases in price, so does the call option premium (we refer to the market price of an option as the “premium”). The inverse tends to hold true.

Other factors impact the premium, including how close you are to the option expiration date — in this case, June 2021. We’ll save this concept — time decay — for another day. I don’t advise doing anything with options until you understand the ins and outs of how they work, specifically time decay. It’s best to start with the basics we present here before moving forward. It’s like learning a language. You’re not going to speak it in public settings until you establish a proper foundation.

You’re likely going to do one of two things as your trade takes shape.

If the underlying stock trades to $10 or higher prior or up until the option expiration date, you can exercise your option and buy the stock for $10, even if it’s trading higher. You’ll need cash (or buying power) in your account to cover the cost of 100 shares at the $10 strike price. So $1,000.

Let’s say the stock drops. If this happens, your option premium will — generally speaking — do the same. As you near option expiration day, it’ll be close to, if not worthless. When an option expires worthless, you only lose the $40 you paid for the call in the first place. This is your maximum loss on this type of trade.

At least in my experience, here’s what’s more likely to happen.

As the underlying stock trades higher, the value of your option premium increases. You can close your long call and make a profit on the premium’s upside. So you’re not concerned with owning the stock. You just want to profit from upside in the option premium, as it rises along with the underlying stock.

To illustrate, I recently blew what would have been a profitable option trade.

I prematurely sold Ford calls I had purchased for about $0.65. After I closed the position, Ford stock went on a massive run. The call options I had already sold ran to about $2.25. I missed out on $160 in profit per contract on a position size of 10 calls.

To make this more relatable, think about dating and relationships.

You’re not going to go the distance with most people you date. Instead, you’ll see them once, twice, or for a few months, then you’ll decide not to exercise your option to buy the stock. You’re more likely to close out the position (sell the premium) taking a loss or pocketing a gain (you break up in a not so good way or amicably). In some instances, the position will expire worthless. You feel like you wasted time in the relationship and lost a little of yourself in the process.

If you’ve found a keeper, you’re going to ride the stock’s upside, then exercise your option, purchasing shares of the underlying stock. You buy them at a discount to the market price and hold onto them — tightly — forever.

Aw, so sweet.

Put another way, most options trades you make will be short-term in nature. You’ll sell the premium — hopefully for a gain — or let it expire worthless. Once in a while, you’re so in love with the underlying stock you want to ask it to go the distance with you (exercise the option = beginning a long-term relationship or taking your existing relationship to the next level).

It took me a long time to really understand how options work. Calls took me some time, but in due process even intermediate and advanced strategies started to come into view. Now I use long calls and covered calls to juice my portfolio a bit here and there. I only dabble in the more advanced stuff.

As with the relationship analogy, it’s best to not rush things. Or maybe you’ll feel certain and secure and want to dive in more quickly. It’s gotta feel right.

Either way, flipping to the language analogy, be sure you’re super confident about the mechanics of options before you put them into real-life situations. It’s always a good idea to trade in a virtual or simulated account before moving onto trading with real money.

This article is for informational and entertainment purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.