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The subject line of the email you send will be "Fidelity. If you are bullish about a stock, buying calls versus buying the stock lets you control the same amount of shares with less money.
If the stock does rise, your percentage gains may be much higher than if you simply bought and sold the stock. Of course, there are unique risks associated with trading options.
Read on to see whether buying calls may be an appropriate strategy for you. The buyer of call options has the right, but not the obligation, to buy an underlying security at a specified strike price.
That may seem like a lot of stock market jargon, but all it means is that if you were to buy call options on XYZ stock, for example, you would have the right to buy XYZ stock at an agreed-upon price before a specific date. The primary reason you might choose to buy a call option, as opposed to simply buying a stock, is that options enable you to control the same amount of stock with less money. Compared with buying stock, buying call options requires a little more work.
Knowing how options work is crucial to understanding whether buying calls is an appropriate strategy for you. There are several decisions that must be made before buying options. Now, compare that with the cost of buying the stock, rather than buying the call options.
This illustrates the primary purpose of options. They effectively allow you to control more shares at a fraction of the price. The ultimate goal is for the stock price to rise high enough so that it is in the money and it covers the cost of purchasing the options. In addition to being able to control the same amount of shares with less money, a benefit of buying a call option versus purchasing shares is that the maximum loss is lower. Plus, you know the maximum risk of the trade at the outset.
If the stock decreased in value and you were not able to exercise the call options to buy the stock, you would obviously not own the shares as you wanted to. Another disadvantage of buying options is that they lose value over time because there is an expiration date.
Stocks do not have an expiration date. Also, the owner of a stock receives dividends, whereas the owners of call options do not receive dividends. This is particularly true for options trades. The maximum potential profit for buying calls is the same profit potential as buying stock: The reason is that a stock can rise indefinitely, and so, too, can the value of an option.
Conversely, the maximum potential loss is the premium paid to purchase the call options. If the underlying stock declines below the strike price at expiration, purchased call options expire worthless.
If the stock does not rise above the strike price before the expiration date, your purchased options expire worthless and the trade is over. You must first qualify to trade options with your brokerage account. At Fidelity, this requires completing an options application which asks questions about your financial situation and investing experience, and reading and signing an options agreement.
Assuming you have signed an options trading agreement, the process of buying options is similar to buying stock, with a few differences. You would begin by accessing your brokerage account and selecting a stock for which you want to trade options. Once you have selected a stock, you would go to the options chain. An options chain is where all options contracts are listed. Then you would make the appropriate selections type of option, order type, number of options, and expiration month to place the order.
With the knowledge of how to buy options, you can consider implementing other options trading strategies. Buying call options is essential to a number of other more advanced strategies, such as spreads , straddles , and condors.
Once you master buying calls, the world of options opens up. Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Before trading options, please read Characteristics and Risks of Standardized Options.
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You should begin receiving the email in 7—10 business days. We were unable to process your request. Please Click Here to go to Viewpoints signup page. How to sell covered calls. Put a collar on this market. Skip to Main Content. Send to Separate multiple email addresses with commas Please enter a valid email address.
Your email address Please enter a valid email address. There are additional costs associated with option strategies that call for multiple purchases and sales of options, such as spreads, straddles, and collars, as compared with a single option trade. Views and opinions expressed may not necessarily reflect those of Fidelity Investments.
These comments should not be viewed as a recommendation for or against any particular security or trading strategy. Views and opinions are subject to change at any time based on market and other conditions. Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted. Please enter a valid e-mail address. Important legal information about the e-mail you will be sending.
By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf. The subject line of the e-mail you send will be "Fidelity. Your e-mail has been sent. Related Articles How to sell covered calls This options strategy can potentially generate income on stocks you own.
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