New to options trading and want to know how to buy a call option? Jacob Mintz, Cabot’s options expert and chief analyst of our Cabot Options Trader and Cabot Options Trader Pro advisories, tells you how it works in this video tutorial. If you like what you see and want to learn more, click here.
Enjoy!
(Full transcript of the video below:)
Hello traders and investors. This is Jacob Mintz, Chief Analyst of Cabot Options Trader. In today’s video, we’re going to talk about how to buy a call option. But first, a bit about me. Again, my name is Jacob Mintz and I’m the chief analyst of Cabot Options Trader. I was a market maker on the floor of the Chicago Board of Options Exchange for nearly 10 years, then ran a proprietary trading desk, and now write for Cabot Options Trader.
So let’s dive in on how to buy a call option.
First of all, what is a call option? A call option gives its owner the right to buy 100 shares of stock at the strike price any time prior to options the expiration date. Now that’s a tough definition, but we’re going to break that down a little bit more. So let’s start here. Each one equity call option represents 100 shares of the underlying stock. It’s a multiplier of 100. So if you buy two equity call option that represents 200 shares. If you buy five calls, that’s the right to buy 500 shares.
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So what is the cost of buying a call option? Well, just like when we were talking about each one call represents 100 shares and it’s a multiplier of 100, similarly, it’s the same with the cost. So if you buy one call for 50 cents, that’s actually $50 at risk. You buy one call for a dollar, because it’s a multiplier of 100, that’s actually $100. And if you buy one call for $2, that’s $200. All a multiplier of 100.
So what’s the risk in buying call options? When you buy a call option that’s a bullish position, you want the stock to go higher and if it doesn’t work, the potential loss for the buyer of a call option is limited to the initial premium paid. So if you buy that call for $200, the most you could possibly lose is that $200. Bottom line, your risk is limited.
So let’s take a look at a fictional trade, we are going to buy to open the XYZ January 100 Call for $1. Let’s break that down what that actually means.
When you initiate a new option position, it is Buy to Open.
The underlying stock is XYZ. Again, this is a fictional trade and this could be Apple (AAPL), Amazon (AMZN), or Facebook (FB).
The options expiration date is January, so that’s the third Friday in January 2019. That option will cease to exist on that date. You will either have made money or lost money on that trade.
$100 strike price, that’s the price that you have, the right, but not the obligation to buy the stock at.
And last, the price, also known as a premium. In this case, that’s $1, or as we mentioned earlier, it’s a multiplier of 100 or $100. That’s the most you could possibly lose on this trade.
So let’s look at the profit and loss graph. If stock XYZ closes below $100 on January expiration, the most you can lose is that $100. The stocks at $90, most you could lose $100. If the stock is at $80, the most you can lose is that premium paid.
However, above $100, as you can see in the graph there is unlimited upside opportunity.
What’s the advantage of buying a call? Instead of paying $10,000 to buy 100 shares of stock XYZ at $100, you can pay $100 for a call option and have very similar upside exposure. As you can see it is a deep discount and having almost exactly the same upside exposure.
So what do you get with Cabot Options Trader?
Every morning I send my readers my bullish and bearish order flow list from the previous day. These are the biggest hedge fund and institution trades in the options market from the previous day. This is essentially a look inside their options trading. You also get covered call ideas, which are a great way to create yield.
And if I really like a trade, we will execute a trade in a trade alert. Oftentimes this is a trade that I found that is similar to the big hedge fund and institutional trades from the previous day. And I break down how to execute the trades as well as the risks and rewards.
Also, if you’re a high-volume trader, I send Stocks on Watch, which is just another idea generator for people who like to trade quite often.
Also, you could access educational articles, which is a way for me to take beginner level traders to intermediate level trainers, and intermediate level traders to professionals.
You also get access to my personal email for any questions. I want to make sure that you’re executing trades right and that you’re developing as an option trader.
And of course, you get the results. It’s been a great year for Cabot Options Trader and with my trade alerts, my traders have been making quite a bit of money.
Now is the time for every trader and investor to add options trading to your portfolio.
Thanks.
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