A call option is a financial instrument known as a derivative, and is traded just like a stock. It is a contract between the buyer and the seller of the call option, that gives the buyer the right (the option if you will) to buy a certain stock at a specific price on or before a certain date.
But why would I buy a call option instead of a stock? Because using call options can give you substantially larger returns.
Let's use an example.
On Jan 10th 2008, General Electric stock (Symbol GE) is trading at $35.00.
A Feb 2008 $37.50 call option for GE is trading at $0.30. Buying a $37.50 call option will give you the buyer the right to buy GE for $37.50 on or before the call option expiration date.
As you read in the previous article (What is a call option?) SELLING call options against stock you already own is a conservative way for a ‘home investor' to generate more income.
But how does it work?
Let's use an example.
On Jan 1st 2008, you buy 400 shares of AT&T (Symbol T) for $30.00 per share.
A Feb 2008 $32.50 call option for T is trading at $0.50. You sell 4 x Feb $32.50 calls (remember each call option is for 100 shares) and receive $200.00 (400 x $0.50).
Before you will be able to buy and sell options in your online brokerage account, you will first have to enable your brokerage account to trade options. My experience trading options has been primarily with Etrade, however most brokerages have a similar process you have to go through to enable you to trade options.
