Basically, when you buy 1 option contract, you’re buying the right to buy 100 shares of stock. When the price of the stock meets and exceeds the strike price the option goes in the money, i.e. IBM MAY 08 120 CALL for $2.90 a share. The current price of the stock is $117.22. Right now this option is just out of the money it’s the next option in line to go in the money. The farthest in the money right now for IBM for MAY is the 75 dollar strike price, the farthest out of the money option is $0.10 but zero sell back value.

I usually buy options two to three places out of the money because I’m not likely to exercise them and will probably sell them back to the market 2-3 weeks before expiration. Depending on your personal strategy, it depends on your ideas of how fast this stock will move in the amount time you own the contract. I look for stocks I think will move $10-$20 dollars in a couple of months and buy options two to three months out. Very rarely will I buy front month options. Only if I strongly believe in a particular direction will I buy front month options.

Remember thought, as soon as you buy the option it begins to decay in value.

These are my rules:

Don’t buy more than you’re willing to lose on any trade. Don’t invest more than 20% of risk capital on any one trade. Always set a stop lose. Never buy deep out of the money options (the stock has to move too much to effect the option price/premium. Know my entry and exit points.

There isn’t really any maximum or minimum price on a premium. It all depends on what you as an investor are willing to put up for a possible predetermined return on your investment.

Option Trading : When you are bullish Buy a call option, why buy a call option and not sell a put option because by selling a call option there is an unlimited risk. Suppose if the market or the stock turns against you then you will be in loss which is not limited. for example: If a stock is trading at 100 and the call option value is 10 and put option is also at 10 and the market lot is 50 then your total rish in buying a call option is 50*10=500 and by selling the put it would be 50*10=500. Here if the stock value is 80 end of month the money you loose in a call option would be 500 but for the put it would be -500(Loss) ie. put rate would be 20.

Buy at the strike calls suppose if the stock is at 100 buy call strike 100 or 110 if you think the price will be 110 end of month.

You probably should not buy any until you can decide for yourself which one you want to buy. The risk/reward characteristics are different for the different options. You should choose the option that has the characteristics you want.

You should choose the option that has the characteristics you want. Until you know how to do that you should not buy any.

The maximum price possible for a call option is the price of the underlying.

Unless the option has been adjusted, the underlying for each stock option is 100 shares. An option my be adjusted due to a split or a merger.

For any two call options with same expiry and underlying, the one with the lower the strike price will be more expensive. that means the one with with lowest strike price will be the most expensive.

If the price of the underlying is equal to an option strike price, the option is “at the money”. If the price of the underlying is less than a call option strike price, the option is “out of the money”. If the price of the underlying is more than a call option strike price, the option is “in the money”. If the price of the underlying is a lot more than a call option strike price, the option is “deep in the money”.

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You are not going to learn about options very effecitvely just by asking question. You need a more structured learning environment.

One place you can start is with the free tutorials at

Another good web based learning resource is

Even though these are good resource, I still strongly recommend you read one or two good books about options before trading them. All of the books in the bibliography at

are good books if they are written at a level you you can understand.

I will also mention there is a new book out titled

The Rookie’s Guide to Options:
The Beginner’s Handbook of Trading Equity Options

writen by Mark Wolfinger who (as “dagnyt”) regularly answers questions on the message board at

If the ability to ask the author questions directly appeals to you that may be a choice worth considering. You can read more about it at