John Jagerson

What is a Call Option?

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Call options gain value as a stock's price increases. Option traders will buy calls when they think the underlying stock or index will move up. One of the most obvious advantages of a call option is that it is much cheaper to buy than buying the stock itself. However, like all options, you have to plan your trade to make sure you are not taking on too much risk.

A call option gives you the right to buy the stock for the strike price. In the chart below you can see Oracle Corp. (ORCL) beginning to break out of a consolidation range in the direction of the prior positive trend. In this case, you could have purchased a call option (ideally with a strike price as close to the current stock price as possible to take advantage of higher prices in the future).

In this case, the closest strike price to the stock's price of $21.67 is $22 which would have given you the right to buy the stock any time before expiration for $22 a share. This call option would have cost you $.75 a share or $75 per contract. Expiration was June 20th, 37 days into the future.