To close out the trade, you must buy the call or put option back using a sell to close transaction order. The buy to close transaction order is used to close out an existing option trade. The trade was originally opened using a sell to open transaction order by which you sold a call or a put.
This placed you in a short position regarding the underlying security. When you are ready to exit the trade, the buy to close transaction order closes out your short position. For a put trade to profit, the underlying security price must fall enough to drive the put option price below the break-even point. When you establish a short option position, you are credited with the option premium.
The short position also makes you vulnerable to large losses should the trade move swiftly against you.
What Is Options Trading?
As more the price of the underlying security continues to rise, the greater your loss will be. Based in St. Petersburg, Fla. She received a bachelor's degree in business administration from the University of South Florida. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system.
When first venturing into the wide world of options I learned that long calls could be used as a substitute to stock. They offer a much cheaper, more limited risk avenue to bullish exposure.
Essential Options Trading Guide
Given the advantages, you might be wondering why you would bother with buying stock at all? That, dear readers, is a great question. When it comes to trading, there are very few absolutes. One is not automatically better than the other.
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In fact, I suspect traders harnessing that much capital struggle with knowing where to put it all! Do you know how many cheap call trades you would have to do before making a dent in such a big pile of cash? Dozens upon dozens. So many that if you actually deployed them all you would be way, way , overleveraged. One: Get comfortable with seeing a large percentage of your account sitting in cash.
Suppose I want to build some legacy positions for my portfolio. You ever hear stories of how some lucky person received a grand inheritance from their grandma because she invested her money every month in the stock market for fifty years? So, I have some of my money earmarked for incremental investments into stocks. The final situation or reason for using stock over options is when I want a straightforward, liquid delta play. If the underlying stock declines below the strike price at expiration, purchased call options expire worthless.
Long Calls
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.
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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. Supporting documentation for any claims, if applicable, will be furnished upon request.
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.
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Going Long in Options: Long Call Options, Long Put Options, Strategies
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