Understanding Call Option Contracts

Call Options are bullish strategies, thus the investor needs the market to rise. As the market rises, the premium price will rise. If the premium rises above the cost that was paid for the option, the investor can trade the contract back to market. The customer can also excerise the option (buy the stock at the set strike price) and sell it in the open market.

All option contracts expire monthly and are based on 100 shares.

Call Option Example

BUY 1 IBM SEP 95 CALL @3.50

Purchasing this IBM call option cost the investor $350. The contract is based on 100 shares and expires in September. The holder has the right to buy 100 shares of IBM at $95 and has until September (near the end of the month) to either trade out of it or exercise it. The $350 or 3 1/2 points is the maximum loss, if the contract expires. The investor needs the market to rise 3 1/2 points for the person to "break-even".

The maximum gain on this position is unlimited, since the market can rise to an infinite amount.
The maximum loss is the premium of $350 paid
The break even is 98.50

Trading Strategies:

There are several dynamic strategies and set-ups with calls. One is called Spreads. A spread is the buying and selling of call options, while looking to make a spread on the premiums bought and sold or on the strike price difference by trading or exercising them. Learn more about spreads Here

Another strategy is called a Straddle. A straddle is buying calls and Buying Puts, which is called a long straddle or writing calls and writing puts, which is a short straddle.

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Recommended Book Titles on Options

Options as a Strategic Investment - Reflecting today’s market realities and the new innovative options products available, this fourth edition features an in-depth analysis of volatility and volatility trading; updated information on all stock option strategies, reflecting recent market conditions; buy and sell strategies for Long Term Equity Anticipation Securities (LEAPs); detailed guidance for investing in the growing field of structured products; the latest developments in futures and futures options; and the market impact of the most recent changes in the margin rules.

Options Made Easy : Your Guide to Profitable Trading (2nd Edition) - This book can be used by any options trader, although it is fair to say that it is most specifically targeted toward novices and intermediates. Simplicity is the name of the game here, and I have made it my mission to enable anyone and everyone to learn and apply the benefits of options trading simply and easily. By giving you a grounding that is second to none, we look to give you the solid foundations required to give you the confidence to enable you to become a dynamic and successful trader. And we want it to be a fun and pleasurable experience too!

Option Volatility & Pricing: Advanced Trading Strategies and Techniques - Written in a clear, easy-to-understand fashion, Option Volatility & Pricing points out the key concepts essential to successful trading. Drawing on his experience as a professional trader, author Sheldon Natenberg examines both the theory and reality of option trading. He presents the foundations of option theory explaining how this theory can be used to identify and exploit trading opportunities. Option Volatility & Pricing teaches you to use a wide variety of trading strategies and shows you how to select the strategy that best fits your view of market conditions and individual risk tolerance.

Options and Options Trading : A Simplified Course That Takes You from Coin Tosses to Black-Scholes - Options and Options Trading breaks the code that envelops the often-foreign language of options, providing an accessible introduction into how the options market works as it explains the rules that traders must understand if they hope to take part in this high-leverage, high-profit game. Author Robert Ward's goal is simple--to demystify the tangled world of options trading without leaving readers too confused and frustrated to continue.