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Call Options: A
Bet on the Upside By
Ken Trester
Call options are a bet that a stock is
going to increase in price. Buying call options can be a very profitable
play since options cost a small fraction of actually buying the stock.
Instead of paying $35, $78, $112 or
more for a single share of stock you can use call options to
control 100 shares of stock for as little as $25.00. That's
quite a bargain!
But make sure to select options that are cheap and underpriced, and are
close-to-the-money (the stock price is close to the strike price).
Also look for as much time as possible before expiration.
Another way to get a good price is to find a stock that is moving in a two
or three point trading range. Try to buy cheap call options when the stock
is at the lower end of its range, and cheap put options when it is at the
upper end.
Entering Orders
When you buy options always use a limit order, which is an order that
requires that you get your price or your trade won't be made. Don't use a
market order, where you get whatever the asked price is when your order
makes it to the floor of the exchange.
Option prices can change quickly and you could end up buying an option for
more than you thought you were.
When I buy options, I am real patient and it may take four or five tries
before I get an order executed.
For example, recently I was trying to buy a Jan 15 Call when the stock was
at 14-1/2. The bid-asked prices were 1/8 - 5/16. I never initially pay the
asked price; I try to get a better price. So I entered a limit order to
buy the option at 3/16, just 1/16 above the bid.
Three hours later I got the order off at 3/16, and $18.25 (3/16) is a lot
cheaper than $31.12 (5/16).
The lesson here is that sometimes it pays to try to get a price between
the bid and asked prices. A limit order helps you do that; a market order
does not.
How to Discover More
Trading Opportunities
The key to success in the options game is price. Unless you know if an
option is truly a bargain you cannot win! Bargain hunters who consider
price first and foremost are the ones who consistently win the options
game.
Options market professionals ALWAYS use pricing formulas. They're
constantly on the lookout for underpriced and overpriced options. So it
makes sense that YOU need an options pricing formula that gives you that
insider's edge.
For more about trading call options click
here.
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