a call option is the right to buy 100
shares of a stock at a fixed price per
share by a predetermined date it is
named an option because in this case the
buyer of the call option has the option
but not the requirement to buy the
underlying stock so let's look at an
example Microsoft is a popular stock so
let's use Microsoft's call options for
our example in the first part of the
video we will look at buying a call
option in the second part we will look
at selling a call option so if we were
going to buy a call option what does
that mean that means that we are going
to pay something today the amount that
we paid today is called the premium for
one option this premium buys us the
right to purchase 100 shares of
Microsoft stock by a certain date which
they call the expiration date and for a
certain price generally they call this
the strike price sometimes you may hear
it called the exercise price those two
terms mean the same thing now just to be
clear one option represents the right to
buy 100 shares so now let's look at some
actual numbers last week I pulled down a
quote for some call options from
Microsoft from my broker here's what a
quote looks like first off all these
prices here are for call options in fact
they are for call options that expire on
July 20th 2018 which was 93 days away
when I pulled down the quote July 20th
this is the expiration date that I
mentioned before which means that when
you buy one of these call options they
will actually expire at the market close
on the expiration date there are other
expiration dates available that are not
showing here but as you can imagine if
you were looking to buy a call option
that expired and just say 30 days versus
the 93 days here that would be cheaper
than this one but if on the other hand
you were looking at a different option
that had a 120 days until expiration
well that would cost more they call that
time value the more time there is the
more you have to pay okay
so let's look at some choices he
we can see that Microsoft is currently
trading at ninety 6.44 cents so if we
wanted to buy an option with $100 strike
price we would pay three dollars and 20
cents per share so since we know that
there are a hundred shares in an option
we can do the math rather simply three
dollars and twenty cents times a hundred
means that we'll pay three hundred
twenty dollars per option what does this
mean for us well let's imagine that
Microsoft climbs from the current price
of ninety six dollars and forty four
cents to a hundred and ten dollars per
share over the next 90 days well since
we own the call option we have the right
to buy those 100 shares for $100 per
share even though the stock is currently
trading at 110 we can see that there are
currently 93 days remaining and we said
90 days of past which means there is
still three days remaining so another
choice would be for us to simply sell
the call option it would likely be
training just over ten dollars per share
since we know that it is ten dollars in
the money and there are only three days
left so there's very little time value
this brings us to another point
all of these strike prices here we can
see that the current share price is
right here so for call option if the
current price is greater than the strike
price they call that being in the money
if the strike price is greater than the
current price they call that being out
of the money and if the current price
and the strike price are at the exact
same spot they would call that being at
the money so as you can see from our
example options can be quite profitable
you paid three hundred twenty dollars
for an option that you've sold 90 days
later for over a thousand dollars but
what about the risk let's imagine that
the same 90 days passed but this time
the stock just hung around the current
price the whole time let's pretend that
the price was 98 dollars
well now the option will be worth
practically nothing it is out of the
money since the current price is less
than the strike price and there's only
three days left now let's assume that
those three days pass and Microsoft
stock is let's say at ninety nine
dollars which is short of our $100
strike price that means that your call
option has now expired and is worthless
this is the downside to buying a call
option if the stock doesn't go where you
need it to go
you lose your initial investment of $320
high-risk high-reward so when would be a
good time to buy a call option well
perhaps you believe the stock will move
much higher over the next few months but
you don't want to commit the capital
necessary to buy the underlying chairs
buying a call option could be a good
alternative for you what about selling a
call option how does that work so let's
imagine that you currently own 100
shares of Microsoft and you would like
to try to get a bit more income out of
your position you may opt to sell a call
option if you own the actual shares and
you sell a call option which gives the
buyer of the call option the right to
buy your 100 shares from you they call
this a covered call covered calls are
often used to generate income on a stock
position you already have let's look at
an example so if you own 100 shares and
you sell a call option you might often
hear this referred to as writing an
option writing an option and selling an
option are the same thing let's imagine
the strike price is the same $100 strike
price we looked at before but this time
you're selling it so when you sell the
call option you will receive this number
here 3 dollars and 10 cents per share or
310 dollars now essentially what you
have sold is the right for someone else
to buy the 100 shares at $100 per share
in return you immediately receive their
310 dollar premium if the stock price is
below the current strike price 93 days
from now when the option expires you
keep your 100 shares and you keep it's a
$310 premium you've received once again
this is known as a covered call they
call it a cover call because you already
own the 100 shares just in case the
option ever gets exercised if you didn't
own the shares it would be called the
naked call we will dive into that one in
a different video so what is the
downside to a covered call
well what if Microsoft goes to the $110
per share we mentioned before well you
are obligated as the writer of the
option to sell your 100 shares at $100
which is the exercise price so what you
gave up was upside potential I have seen
many people use this strategy quite
effectively they sell an option
far enough out of the money and try to
generate enough income to juice up their
performance at the end of the day
options can be a fantastic tool when
used properly in our next video we're
going to look at the basics of put
options and after that we're going to
look at various ways you can combine
both calls and puts to make for some
very powerful options if you have any
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