How to Buy Call to Open Options and Profit from Rising Stock Prices
If you are bullish on a stock and want to profit from its upward movement, buying call to open options is one of the strategies you can use. In this article, we will explain what call to open options are, how they work, and how to buy them.
What are call to open options?
Call to open options are contracts that give you the right, but not the obligation, to buy a certain number of shares of a stock at a specified price (called the strike price) before a certain date (called the expiration date). You pay a fee (called the premium) to buy the option contract.
How do call to open options work?
When you buy a call to open option, you are betting that the stock price will rise above the strike price before the expiration date. If that happens, you can exercise your option and buy the shares at the strike price, which will be lower than the market price. You can then sell the shares at the market price and pocket the difference as your profit.
Alternatively, you can sell your option contract before the expiration date and profit from the increase in its value. The value of an option contract depends on several factors, such as the stock price, the strike price, the time to expiration, and the volatility of the stock. Generally, the higher the stock price and the longer the time to expiration, the more valuable the option contract.
How to buy call to open options?
To buy call to open options, you need to have a brokerage account that allows you to trade options. You also need to have enough cash or margin in your account to cover the cost of the option premium.
Once you have your account ready, you can follow these steps to buy call to open options:
- Choose a stock that you are bullish on and want to buy call options on.
- Find an option chain for that stock on your brokerage platform or an online tool. An option chain is a table that lists all the available option contracts for that stock with different strike prices and expiration dates.
- Select an option contract that suits your risk-reward profile and budget. You can use various criteria to choose an option contract, such as the delta, which measures how much the option price changes with respect to the stock price; the theta, which measures how much the option price decays with time; and the implied volatility, which measures how much the market expects the stock price to fluctuate.
- Place an order to buy the option contract at a limit price or a market price. A limit price is the maximum price you are willing to pay for the option contract, while a market price is the current price of the option contract. You can also specify how long your order is valid for: until canceled (GTC), until end of day (EOD), or until a specific time.
- Wait for your order to be filled by your broker. Once your order is filled, you will own the option contract and have the right to buy the underlying stock at the strike price before the expiration date.
Buying call to open options is a way to profit from rising stock prices without buying the stock outright. However, it also involves risks, such as losing your entire premium if the stock price does not move in your favor or expires worthless. Therefore, you should only buy call to open options if you are confident in your bullish outlook and have enough capital to withstand potential losses.