Introduction to Options: Part 2: Buying & Selling Call Options

Buying & Selling Call Options

This is the right, but not obligation to buy a stock, at a certain price, by a certain date, in groups of 100 shares.

This is the step most options traders start with, and many never move beyond this first step.
It is easy to understand buying and selling options.
Buy Low and Sell High
Depending on the strike price, time until expiration and whether you guess the market direction correctly, these can be successful gambles.
Additionally, options contracts for stocks are bought in contracts controlling one hundred shares, and any movement in the price of the stock is magnified in movement of the price of the option.
This makes options widely leveraged and potentially 10x to 100x profitability.
However, almost 80% of purchased Call options expire worthless, with total loss of invested capitol.
This makes them seem more like lottery tickets then investments, and many investors avoid them for these reasons.
Probability of Success
Ironically, options are the most transparent stock based investment you can make, because the probability of success for a given strike price is quoted in the Option Chain Table.
But many people don’t like math, and like probabilities and statistics even less. So they ignore the probabilities indicator, and focus not on the chance of success, but instead on the potential profits.
This thinking is called a lottery ticket mentality. People who buy a single lottery ticket, when 200 million are sold, are ignoring the 1 in 200 million odds against them winning, and instead focus on the thought of what they will do with their winnings, if they win.

Call options are where most options traders begin their options trading journey. These options are easy for most traders to understand, and although they provide you a probability of success number when you look them up. Most traders buy the cheapest options, with the highest leverage and highest payout. They ignore the low probability of success when buying low cost, low probability of success strike prices with big payouts, because they can buy several contracts and potentially win large somes of money. I think it’s still a good place to start because becoming successful requires learning about options thoroughly, and that knowlege is a good stepping stone on the path to becoming a more successful and consistent options trader.