Getting your feet wet Without getting in up to your you-know-what Option trading is more complicated than trading stock. And for a first-timer, it can be a little intimidating. Especially out-of-the-money calls strike price above the stock pricesince they seem to follow a familiar pattern: buy low, sell high.
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Because you can buy a lot of them. And remember, one option contract usually equals shares. And that kind of move can be very difficult to predict.
Holy smokes. At first glance, that kind of leverage is very attractive indeed.
Getting your feet wet
All that glitters isn't a golden options trade One of the problems with short-term, out-of-the-money calls is that you not only have to be right about the direction the stock moves, but you also have to be right about the timing. That ratchets up the degree of difficulty.
It needs to go past the strike price plus the cost of the option. How many stocks are likely to do that?
If you want to start trading options, the first step is to clear up some of that mystery.
So in order to make money on an out-of-the-money call, you either need to outwit the market, or get plain lucky. You were right about the direction the stock moved. Even if your forecast was wrong and XYZ went down in price, it would most likely still be worth a significant portion of your initial investment.
Option buyers are charged an amount called a "premium" by the sellers for such a right. In contrast, option sellers option writers assume greater risk than the option buyers, which is why they demand this premium. Options are divided into "call" and "put" options.
In fact, this section alone includes three plays for beginners to get their feet wet, and two of them do involve calls. These strategies are: options for beginners LEAPS calls long-term options as a stock substitute selling puts on a stock you want to buy.