Stock traders can buy and sell call options to limit their exposure to losses when investing. Investments required understanding, and knowing how to use call options can be a valuable if they are executed properly. Like all investments, there are risk and rewards that are looked at in a step by step manner that is covered by this page along with explained call options.

Investing should will always be about making money, and a call option is one of the devices available to the investor like any Instrument is available to anyone wants to learn how to play something musical. But just like the violin is not for everyone, option trading and call options are an tool that has its own intangibles that make it special and not for everyone.

Before trading call options you need to understand the terms and features of a call option. Then like all trading of investments, you research into the company which the option belongs along with how the stock price fluctuates and where you want to trade. Then you follow through with your hard work and make your investment a watch for a positive financial outcome. Following the steps on this page will get you closer to your goals.

The content in this page is not a substitute for professional financial advice. Please contact a finance professional before using the information presented here."

An equity call option is a contract for the right to buy between a buyer and a seller for one hundred shares of stock that can be bought before a set date at a set price where after date the right to buy the shares expires.http://www.youtube.com/watch?v=UzVHTkni3xA While the concept is simple enough there are terms that need to be understood and items that need to be considered before moving on. Below are a list of terms you will find useful in understanding Call options.

TERMS

Call Option: the option to buy a stock at a certain price before a certain date.

Contract an option contract consist of 100 shares of one company that can be bought.

Point: the price of an option.

Expiration Date: the date the option has to be exercised or the offer to buy or sell becomes annulled.

Strike price: the price on the option that must be paid to exercise them

Market price: the price a stock is traded on a stock market.

Market to Strike ratio: The ratio is the difference between the price on the options and the market value.

Exercise: the action taken to buy the shares by the holder of an option.

In the Money: When a strike price is below the market price. This is where you want to be.

At the Money: When a strike price and the market price are close.

Underwater: when the strike price is above the market price. This is not where you want to be.

This step has steps within steps as you look for a place to trade options, and the companies with which you want to invest. Doing your research is always an important element of investing.

1. Finding a broker is important regardless if you invest over the phone or invest online. There are several exchanges that handle options trading including the Chicago Board of Exchange (CBOE) which is the biggest which traded 27% percent of the total trades in 2009. To have a seat on the CBOE you would need to buy one which were going for around $2,500,000 during February 2010.http://www.cboe.com/AboutCBOE/Seats.aspx So unless you have some serious pocket change hanging around you will need a broker. Looking for a broker should include looking at the commissions they charge, the speed they can handle your transaction, and the tools they offer for trading. And those tools should include research on companies and how the share prices of those companies fluctuate and trade.
2. Finding a company you want to invest in always a challenge even when you are just looking to buy shares of a company let alone options. Unlike buying a stock, an options contract only has a limited before it expires. There are several factors to consider when viewing a call option in a stock that will be covered in the next step.

A call option is a bullish investment as it works only if a stock goes up in value. As with buying a stock you expect it to go up. You have to have a reason or reasons why it will go up and believe enough to risk your money. But unlike a stock purchase you are only in risk of what you paid for the right to buy the stock and not the stock price. At any time before the expiration if the call option is the money, you can exercise your right to buy the stock at the strike price. Time is also a factor and should be considered when trading call options.http://www.cboe.com/LearnCenter/cboeeducation/Course_01_04/mod_04_11.aspx

Here are some things you should look at before you buy a call option?

1. What is the market price of the stock and how much do you expect it to go up?
2. What is the strike price of the call option you want to buy? (There are several prices near market price on the issue date that are priced according.
3. When is the strike date? You can’t sit on an option like a stock, the option has a time limit where it expires and becomes worthless.

1. What dates within the company should be kept track of? What you are looking for is earnings, or product launches that could affect the stock.

Should the option become in the money there are some things to be considered also.

1. Do you plan to sell the option or exercise the call? You should make your decision before time forces you to do it.
2. How much profit do you need to cover the brokerage cost? Just like any business, trading has a cost to keep in mind before selling.
3. Do you take a profit when you see one or do you wait and hope for more and risk the profit you have? This is the question that is the hardest to answer even for the seasoned investor. There are books written on the subject, but only the best and luckiest know when to trade.

For investors who like limited financial risk and are willing to work with time constraints a call option can be a useful asset to use. But always know everything you can before putting you money at risk.

The content in this page is not a substitute for professional financial advice. Please contact a finance professional before using the information presented here.