Today, what I’d like to do is go in detail about:
- What it means on buying a call option;
- and How you can execute that trade.
If you’re new to options trading – if you’re just getting started, this is an excellent video to watch. There’s a handful of other videos that I have regarding the basics of options trading. By all means, take a look on my website at https://tradersfly.com/.
What is a call option?
- When you’re buying a call, it means you’re looking for the stock to go to the upside – a bullish direction
- You can also sell a call, which says you’re looking for the stock to go down or it’s a bearish position.
There’s four parts to those trades:
- Buy a call
- Sell a call
- Buy a put
- Sell a put
For people that are looking to buy a call, they’re typically looking for a stock to go up and they have a bullish outlook.
Here’s my cheat sheet for looking at the different direction
If you’re a buyer and you’re looking for a call, you typically want stock prices to go up.
If you’re a buyer of a put, you want stock prices to go down.
If you’re a seller of a call, you are in a similar situation of buying a put because you want stock prices to go down.
And if you’re a seller of a put, you want stock prices to go to the upside because you’re taking the opposite side of the trade.
Let’s take a look at the Risk Profile Picture of buying a call
In our case, on the left side is our profit and then we have our loss based on the zero line. Anything above that zero line is a profit and can be low.
If the stock price starts out at $35, that’s our starting point – that’s the zero line, and a stock price goes up to 40. At this price point, we draw it across, and that’s our profit point.
If we go into the $50 range, that’s our profit point. A little bit higher.
What is the pink line and what is the black line?
The black line is at expiration – that’s when that contract expires.
The pink line is today.
If that price went a day to the upside, I would make the most or the maximum amount. However, the problem is that with time, that line gets closer and closer to that black line. That pink line gets closer and closer to the black line.
You are playing against time when you’re dealing with buying a call position.
That’s the tricky part for many traders, and that’s why they lose a lot when it comes to options because they buy a call. If the price goes down a little bit plus they lose some of the time value, and it gets to 30, they’re at a loss not only from the price perspective but also from the time value perspective.
That’s how this profit picture works. It’s easy to understand. We even look at them once, you get the hang of looking at profit picture. Simple terms, anything above that zero line, if you fall into this range. This price point you’re looking at, you’re at a profit. If you’re below that range here at a loss because that is your zero line. Right here on this black line, that’s your maximum risk. That’s your maximum loss as well.
On buying a call, you have unlimited profit potential because you’re looking for an upside move. You have an unlimited profit potential in this example and this scenario in a situation. That’s a lot of times why people buy a call contract.
However, it’s not always the most profitable simply because you need that stock to move. We show you some examples here with looking at selling a call versus buying a call. In this case, if the price standstill, you lose money. If it goes down, you lose money. The only time you make money is if it goes up and in your favor quite a bit.
Let’s look at how to buy a call option contract on a trading panel and platform
Here, I am using the think or swim platform. You could do this in any other brokerage platform if you want. This is just paper money or fake money.
Let’s say I wanted to trade Nike as an example and I want to purchase a call contract at a $55 a share. The typical way or the traditional mentality is that I can do go ahead and buy a single and because I’m choosing the 55 strike price where it also gives me 59 days.
I analyze this you’ll notice the profit picture right here on Nike, as I spread it out, they’ll start to look like the drawing or the diagram that I showed you earlier. Removing a few of these slices so you can see the live price.
Make sure the date is today.
You can see looking at this at the bottom is the Nike strike price. Those are all the prices. The current price is right here 51.54/51.56. I’m looking at 55 as my strike price, so I need it to get here and higher to cover that bid-ask spread a little bit and that’s that tick mark right there.
The primary way that most people do this is I’m targeting 55. If it gets to 55 or above in that 60-day time frame, I can buy the stock even if it’s at 56, and I can buy the stock at 55. That’s what it allows me to do. That’s the traditional way.
Most people who are options traders, they do just the trading within options because what happens is as this get into the $55 range, you’re actually at a profit. In this case, about $120. That’s if it happens tomorrow.
With time, that white line will get closer to the green line, and it may only be $90. But in general, you could simply get out of the contract that can collect your money. That’s another option.