Stock Market Investing: Buying Call Options

Image: Michelle Meiklejohn / FreeDigitalPhotos.net

Image: Michelle Meiklejohn / FreeDigitalPhotos.net

This week I made my second stock option purchase within a month.  I subscribed to Motley Fool’s Option newsletter and followed Jeff Fischer’s advice, buying call options on Johnson & Johnson and Intel.  The risk is somewhat lessened by the fact that these are both solid companies.  Also, the calls don’t expire till 2012…plenty of time for the underlying stock prices to go up even if the market decides to dip a few times in the next year or so.  The way call options work is that I am buying the right to purchase a stock at certain price(strike price) on a certain date.  If the stock is trading below that price on the expiration date, I will not exercise the right to buy the stock and the option will expire worthless.  In that case, I lose the amount of money that I paid for the option.  If the stock is trading above the strike price on the expiration date, I can exercise my right to purchase the stock at the strike price.  What will most likely happen though is that sometime in the next two years I will choose to sell my options to someone else, hopefully at a hefty profit.  Options can be traded through your brokerage account much like stocks.  When the underlying stock goes up, the option typically goes up as well depending on the length of time remaining on the option as well as the proximity of the stock price to the strike price.

So that’s my latest stock market adventure.  More to come…

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