Today we’re going to take a look at how to buy a call option. We’re going to do it step-by-step.
Here we have our TD Ameritrade or thinkorswim platform. You can see here I have some of my positions.
And then here’s your profit and loss.
That’s the baseline. We’re going to take a look at mostly the trade panel and the analyze panel. First off you have to decide where do I want to buy a call option.
The whole point behind buying a call is you’re expecting that stock to head higher. If you’re just buying a call, you’re looking to buy that call for the right in the future to own the stock.
Most people don’t own the shares or purchase the shares. Instead, the value of the contract becomes higher. For example, if you have a purchase order or maybe some kind of deal made where I can get next year’s iPhone or next year’s product for a specific price.
Let’s say it’s $1,000, well, instead of picking up that phone and then reselling it for maybe $1,500 if everybody wants it or if it’s like a hot item for the Christmas season.
What you could do is just sell that ticket to somebody else. And they could pick up and buy that phone. Anyways, with that being said, let’s take a look at buying a call option. If I’m looking at a certain stock (Facebook) to put a call option on.
It’s got only two characters. I’ll go to this trade tab right there, and I’ll type in Facebook and pull that up. Here in this option feed area or the trade area, we have our last price net change, bid, ask, size.
And then under that, you have your calls and your puts also on the other side.
We have the puts over here, and we have the calls on this side.
Usually, when you buy a stock, you just right click buy. And then you choose the number of shares that you want. Here I have 500 shares listed.
And I could right-click confirm and send. Or it could hit this confirm and send button over as well.
I could do that, and then it’ll pull up some option buying power and that kind of stuff. What I also would like to do is sometimes right-click and analyze the trade.
And when you analyze the trade, this is the way the profit picture goes. If I buy 500 shares of this stock right here right now, well, if it goes up to let’s say $95, I would make $1505.
And that’s why I like this analyze tab. That’s because it shows you if that stock price continues to go, you make more money. The way that this works is here’s your stock price on the bottom. If the price continues to go up to 199 or 200, you make more money.
If you buy something for $1 and you sell it for $200 – you make more money. And here’s your zero line.
This, on the left side, is your profit and loss. This is the amount of money you’re making. As you can see from the zero line, if it continues to go down, I’m losing money. If it goes up, I’m making money.
And options work in a very similar way. So what I could do is go in and go to the call side. And I get to decide how many days out do I want to make this purchase.
Here you’ll get to see all the days till expiration.
Options expire. They have a certain amount of time left, just like an insurance premium. This one right here you could see is two days until expiration. This one has nine days. This one has 16 days, 23 days and 44 days, and so on.
Some of these have very long expiration days. You could see some have 807 days to go. If you want a lot of time premium, I don’t want to buy the stock; I just want to deal with the option. I don’t want to pay a lot of money.
The closer you are towards expiration (30 days), it expires quickly. 60 days unless it still expires quickly, but not as fast. And that’s called your theta decay.
If you start going further out like let’s say a 100 days, 300 days there’s not as much theta decay. What you could do is open up and say I’m interested in about 100 days, maybe 200 days option contracts, so I’ll open up this June 2020.
It’s 226 days out. And here’s all your contracts and you get to choose the strike price. The closer you are to the money or at that money, at the current price because right now, that stock is 191.
Well, if you get one option contract at 195, you’re very close to the price. You’ll pay a much bigger premium – here’s your cost.
Right here, bid and the ask. You’ll pay much more at this price at 195; then you will have let’s say 255. That’s because for that stock to go up another 60 points, it’s not as likely. In that case, you have a much cheaper contract.
For example, I could say well, let’s check out something at the 200. I’ll buy right-click, buy a single. You could also just click the ask, and that’ll pull it up as well. I like just to click anywhere and then buy a single.
And now it pulls it up. And you can right-click analyze that trade in the same way we did earlier with the stock. And now I can spread it out. Here you have two lines.
One is at expiration, which is your green line here. That is, in my case. You could, of course, change those colors. And the other line is today – the white line.
With time you have your theta problem, which is $4. You’re paying $4 a day in a way if that stock stands still. Now you can see and move that time date forward with a time that profit and loss right over here.
We’ll continue to get larger. The loss will continue to get larger because if the stock doesn’t move, you lose money. That’s the thing with options. But if it does move, you don’t have to pay the stock. And you could profit from the move.
I could continue to just sit on it for a while rather than owning the shares. To purchase this, all I need to do is right-click confirm and send. And that would send that order in.
Put that in, and you can see it gets in pretty quickly. Here’s my issue here with this one. If I go ahead and stock standstill, I lose money. Stock pulls back, and I lose money. The stock goes up; I make money.
And it has to go up a little bit because I have to counteract the loss in the theta. Or the loss in the premium value. Now, if I would have went out further option instead of a 205 because right now, this one is a 205 call. And the current price is 191. If I had gone further out, I wouldn’t have to pay as much.
This one I paid $1,270 for one option contract. If I go further out and I’ll go to the 280, that’s pretty far out. Buy a single, right-click analyze the trade. And now I’ll uncheck this one, and you can see that I’m only paying $91. Why $91? It says 91 cents over here.
Each option contract deals with 100 shares. That means you multiply this times 100. That’s why it’s $91. And that’s why the same thing with this other one instead of 12,70 you don’t pay 12,70. It’s $1,270.
In this case, it’s $91. But I’m risking $91, but the stock has got to explode. The chances and probabilities are not really in my favorite because it’s far out. I have to the right click confirm and send if that’s what I’m interested in.
I get filled into that contract, and now you can see it’s got a really shoot up and go up. And remember each day I’m losing a little bit of money. But you’re looking for a real big explosive move. That’s the way it works. And that’s how you could choose it on a basic level.
There are more advanced options strategies. But you could say if you want to pay more and get it a little bit closer. And in that case, if it moves, I make quite a bit of money. And then it starts moving more like a stock.
If you go further out, well, so far, it’s a slow move, and then the stock is got to move a ton, but I don’t have to pay a lot of money. I could just pay like $80-$90 and just taking like a lottery ticket and see if that stock explodes.
It could be due to earning, some news, or whatever the case may be. That’s how you could think of it when choosing an option.
Now, to get out of it, you could get out of it early. You don’t have to hold it until expiration. There’s nothing that says you have to hold it till expiration. I could just right-click, analyze the trade, and then confirm and send.
That’s because you can see this would flatten out my curve. I could also go right here to my main page and choose which one I want to go to. You can see it’s 226 days out. And the one I’d want to sell out right-click, analyze, closing trade, or create a closing order.
Both of those will work. I just hit confirm and send, close out the trade and boom. I’m done and out of that position. Right now, I could do the same thing. Instead, I’ll just do analyze on this one right-click analyze the trade, get rid of this other one.
And let’s just tick a couple of these over here. All I’m doing is tick marking in this case right here this one. And then this one together. And you see the curve, and it’ll just flatten that out.
And because it’s flat, that means I’m closing out the position. I could get out of it ten days from now, a minute from now, an hour from now or 200 days from now. Or I could let it expire, and I just right click confirm and send, and then I’m out.
In the case, that’s how it works when you’re buying call options, at least the basics behind it. That’s how it works if you’re looking at trade options in the TD Ameritrade platform. That’s the simple form of it.
I’ll just show you something like this. Here’s a Shopify. This is a double butterfly strategy. You can see this strategy right now on a double butterfly on a couple of contracts.
It’s 3, 6 and 3 spread, two of them. Almost like an Iron Condor if you never heard that term before.
Today it’s up to $395 or almost $500 between multiple days. Let’s take a look at another one. Let me see what else I have here.
Netflix trade right here. This one is up to $44 for the day, but only $15 for the whole position.
It’s not profitable. I was completely wrong on it almost. It didn’t stay or hang around right here. But it’s still doing fine and still holding that position.
Here’s another one. Here’s one of the bigger ones; the longer-term hold that I have is just the overall market. And here’s the SPX, and you can see this is more of a diagonal.
This is more of an advanced strategy, and you can see right here this is up about $3,000 a handful of days on about 11 contracts or so.
This one makes us a positive theta. In either case, you can see you can get fancy and advanced with options if you want. Or you can keep things simple like buying a call like I just showed you.
Whatever works for you, by all means, go for it.
If you want to look at some of these more advanced strategies, check out our websites:
- Rise2Learn
- TradersFly
