The call options gives the buyer the right but not the obligation (except at expiration) to purchase 100 shares of the underlying stock for a set price (the strike price).
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We are talking about stock options, to be clear.
A single call stock option gives the buyer the right but not the obligation (except at expiration) to purchase 100 shares of the underlying stock for a set price (the strike price).
Some options can’t be settled with the purchase of the underlying like an index (you can’t buy an index!), in which case the option would be settled in cash and is referred to as an index option.
What are the main characteristics of call options?
Both put and call options to have three basic characteristics: exercise price, expiration date and time to expiration.
The security on which to buy call options.
Suppose you think XY Company stock is going to rise over a specific period of time. You can consider buying XX call options.
The number of options contracts to buy.
Each options contract controls 100 shares of the underlying stock. Buying 2 call options contracts, for example, grants the owner the right, but not the obligation, to buy 200 shares (2 x 100 = 300)
The strike price.
The price at which the owner of options can buy the underlying security when the option is exercised. For example, XY 100 call options allow the owner the right to buy the stock at $60, regardless of what the current market price is. In this case, $60 is the strike price (this is known as the exercise price too).
The trade amount that can be supported.
Means the maximum amount of money you want to use to buy call options.
The expiration month.
Options do not last forever. They have an expiration date.
But if the stock closes below the strike price and a call option has not been exercised by the expiration date, it expires worthless. And the trader no longer has the right to buy the underlying asset and the trader loses the premium paid for the option.
Most stocks have options contracts that last up to nine months. Traditional options contracts typically expire on the third Friday of each month.
The price to pay for the options.
When you buy the stock for the stock price, you buy options for what’s known as the premium.
Premium is the price to buy options. In 100 XY call options example, the premium might be $4 per contract.
It means the total cost of buying one XY 100 call option contract would be $400 ($4 premium per contract x 100 shares that the options control x 1 contract = $400).
If the premium were $6 per contract, instead of $4, the total cost of buying 2 contracts would be $1,200 ($6 per contract x 100 shares that the options control x 2 total contracts = $1,200).
The type of order.
Options prices are constantly changing, like stocks.
So, you may choose the type of trading order with which to purchase some options contract. There are several types of orders, including market, limit, stop-loss, stop-limit, trailing-stop-loss, and trailing-stop-limit.
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