Stocks & Commodities V. 24:12 (57): Explore Your Options by Tom Gentile
Got a question about options? Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com), an education and publishing firm dedicated to teaching investors how to minimize their risk while maximizing profits using options. To submit a question, post it to our website at http://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C.
RISK OF BUYING CALLS
I’ve recently watched the behavior of call options of some growth stocks during their rallies, and the profit potential looks phenomenal. How dangerous is it to buy naked calls at the beginning of the rally and sell them at the top when the calls are deep-in-the-money? How often do in-the-money (ITM) options get exercised?
An option is a standardized contract or agreement between two parties, a buyer and a seller. A put option buyer has the right to sell or put a stock at a specific price, known as the strike price, until that option expires. The buyer of a call option has the same right to buy or call a stock. Each stock option contract gives the right to buy or sell 100 shares of stock. Option buyers pay a premium for the right to buy or sell the underlying
stock. Options sellers have an obligation to fulfill the terms of the contract. They receive option premiums in exchange for this obligation. A put seller has the obligation to buy or have the stock “put” to their trading account. A call seller, or writer, is taking on the obligation to sell the shares at a specific price.