Call Options Trading Explained
You buy call options to make money when you think the price will go up in the near future.
Just like buying shares, you use the same setup requirement, kind of like swing trading , but focused more on technical analysis rather than fundamental as options trading are short term strategies and time decay can erode the price of options.
Buying Call Options To Make Money When You Think Market Will Go Up In Price (Long/ Bull Call)
So some of my entry criteria and yours for buying options would be:
Once you have identified the stocks /indexes that met these conditions,then ensure the stock you are interested in has more than 100 open interest ( number of contracts open and the call is not exercised yet) otherwise this won't go anywhere. Also check economical calendar. If earning reports are due, stay away from this stock as it could be bad news otherwise.
Once confirmed all ok, you place an order with your option stock broker to
- Select the Call side of option premium price
- Select the required strike price. In or AT THE Money is better, as the stock price more or less match the option price and tend to more or less change at the same speed (DELTA)as the underlying stocks
- Select BUY TO OPEN, using the ASK price
- Select the number of options ( remember 1 contract =100 shares)
- Select stock expiration date to be minimum 4 -6 months away, as you want more time to be right.
- Once stock price rise, your call option value should also rise. You can close the trade anytime you want once you are in profit by placing a SELL TO CLOSE order, once the stock price has risen.
Note, if you are wrong and it's going the wrong direction, rather than leaving it till expiration day where you will lose 100 % of what you paid for, you can place a SELL TO CLOSE order, for which the premium ( quite small now) will be credited to your option account.
Sell Call Options to make money when you think price will drop (Naked Calls)
This is same as above but on the downside so you use the same selling criteria as though you are selling /shorting the stock like downtrend, breaking down and out of consolidating patterns etc. This strategy could be risky on it's own but can be done if the trade is going the way you anticipated.
Now this time, you place call option order with your option stock broker to
- select the Call side of option strike price, look for Out of money ( higher ) price
- select SELL TO OPEN, using the BID price
- select number of call option contracts
- select the stock expiration date to be 1 month or shorter
We want, say Harry who bought the Call to have less time to be right. Time decays exponentially during the last month and even if stock price rise as it approaches expiration, option price may not rise but fall and will expire worthless when time is up.
Sally, or you the SELLER/ writer will keep the premium and don't need to deliver the stocks. The premium say for 1 contract is $ 1 x100 share= $ 100 minus commissions will be automatically credited to your option trading account.
To exit the trade - Buy the Call back before expiration if the trade is going against you.
You can combine buying and selling call options to form
which can give you a higher probability trade.
Note, if you do not have the shares already, some brokers would not allow you to do this as this is more or less short selling, ie selling something you don't have and can be risky if you are wrong and have to buy them back at the loss in order to deliver it back to Harry!
Options Strategy Scanner Together With Elliott Wave Projection And Nicolas Darvas Box
I came across this software that can scan end of elliott wave and also your chosen option strategy like bull/ long call.
It will tell you where to enter the trade, where to put a stop loss, using Nicolas Darvas ( the traveling dancer who turned $20,000 into $2 million in the 1950s). This scanner also tells you where to move your stop loss to lock in profit once the stock moves towards the end of next projected elliott wave fibonacci retracements zone.
Click here to find out more on this
options strategy and elliott wave scanner
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