Featured Stories

2013-04-03

Who has the best online options trading courses?

Well I don't know if it's the best but I'll tell you about a great one; and best of all it's free! It's actually 4 courses:

  • Basic Investing
  • Mastering Options
  • Single-Stock Futures
  • Technical Analysis
Each course has several sections with all the content online. There are also section quizes and a course test online to test your retention of the information. You can check it out at 21stcenturyinvestoreducation.com

How-to's

How to open an option account.

2007-08-06

Story coming soon!

What's that?

What's a Long Call Option

2013-04-02

A long call option gives the buyer of the option the right to purchase a stock at a given price for a defined period of time.
A simple example:

  • A stock is selling today for $50 per share.

  • You buy a long call option for $5.
  • The option gives you the "option" to purchase that stock anytime in the next 90 days at $50 per share.

Why would you want to buy a long option call instead of just purchasing the stock?
Well... The one word answer would be "leverage."
Example where stock price goes to $60 within 90 days:

  • If you bought the stock at $50 and sold at $60 you made $10.
    Investment $50 Return $60 Profit $10
  • If you spend the $50 on long option calls you have purchased the option to buy 10 shares,($5 per option X 10 options = $50). So if you exercise your option you get to buy 10 shares of the stock for $50 and sell them for $60.
    Investment $50 Return $100 Profit $50

That's great! Why would anyone want to buy the stock for $50 and make $10 if they could buy the long option for $50 and make $50?
Well... The one word answer would be "risk."
That extra $40 profit comes with a load of risk. You have only 90 days to execute your option with the stock price at $55 or higher to break even or make a profit. If you do not execute your option within 90 days it expires... worthless!
Example where stock price drops to $40 and you never execute your options within 90 days:

  • If you bought the stock at $50 and sold at $40 you lost $10.
    Investment $50 Return -$10 Loss $10
  • If you spend the $50 on long option calls you have purchased the option to buy 10 shares,($5 per option X 10 options = $50). You never exercise your option because the stock has dropped from $50 to $40.
    Investment $50 Return -$50 Loss $50
As you can see the leverage you gain with a long option call comes with a great deal of risk. If the stock does nothing for the term of the option you lose all your investment. But if you were certain that a stock was going to take off in the near future and you wanted to maximize your profit then the long call option is the way to go.

What's a Gamma?

2007-08-06

What does Gamma mean in reference to options trading?