How to Buy Stock Calls

If you believe the market price of a particular stock is going to increase, you are said to be "bullish" on that stock. To take advantage of the rise in stock price you could purchase the stock outright, or you can profit from an increase in the stock's price without owning the stock by purchasing a call option on that stock. A call option gives you the right, but not the obligation, to buy a particular stock at a set price for a predetermined period of time.

Step 1

Set your financial goals and develop an investment strategy. Make sure buying call options as part of your investment strategy will help you achieve your financial goals. If you discover buying calls doesn't meet your financial goals, consider revisiting your investment strategy to find a more appropriate investment.

Step 2

Open an options account. You must have an options account even if you already have a cash account or a margin account with your broker. Your broker should give you a copy of the "Characteristics and Risks of Standardized Options," which is also known as the Options Disclosure Document. You'll need to verify that you have read and understand this document before you can trade options. You'll have to provide certain personal information, including your name, Social Security number and physical address. Trading options is a sophisticated investment strategy that can involve significant risk. It is not appropriate for all investors, and your broker must determine that it is appropriate for you before you can open an options account and begin trading.

Step 3

Determine the call option you want to buy. Each call option includes three components: the underlying security, the strike price and the expiration date. Stocks that offer call options typically have multiple strike prices and expiration dates that can extend out to one year. Typically, options with a longer the expiration date will cost more than identical call options with shorter expiration dates. Call options that have a strike price below the stock's current market price command a higher premium than those with a strike price above the stock's market price.

Step 4

Enter your buy order with your broker, designating the underlying security, the strike price and the expiration. You can typically enter the same types of orders you use for stock transactions. For example, you can enter a market order, which will execute at the best price available, or you can enter a limit order, which designates the highest price you are willing to pay for your option.

Step 5

Watch the market. If the market price of the underlying stock rises, the value of your option typically rises as well. If your option is in-the-money -- that is the strike price is below the stock price -- the value of your option will move in lock-step with price movements of the stock. If the stock price drops, the value of your option will also drop. If you wish to own the underlying stock, you can exercise your option and purchase the stock for the strike price. You can also close out your option by selling it, which might result in either a profit or a loss. If you don't exercise or close out your call option by its expiration date, the option will expire, become worthless and cease to exist.

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About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

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