A call option is a contract that allows you to buy some assets at a fixed price called the strike price. In the case of a stock option, the call controls shares of stock until it expires. To execute a call, you first must own one. The purchase price of a call is called the premium. When you execute a stock call, you are converting it into the underlying stock for the per share strike price. Upon execution, the option disappears from your account, your cash balance is reduced by an amount of money equal to times the strike price and shares of the underlying stock are deposited into your account.
Compare the option strike price to the current stock price. Trade an out-of-the-money call. You would then sell the call at its current premium to make back some or all of your original premium. Calculate your first alternative for an in-the-money call. Calculate your second alternative for an in-the-money call. Execute the more profitable alternative. The call will be removed from your account and be replaced with shares of stock.
The purchase amount, equal to times the call strike price, will be deducted from your account. Your cash balance will be reduced by the price of the stock and will be increased by the premium of the call. Based in Chicago, Eric Bank has been writing business-related articles since , and science articles since His articles have appeared in "PC Magazine" and on numerous websites.
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Skip to main content. Step 1 Compare the option strike price to the current stock price. Step 2 Trade an out-of-the-money call. Step 3 Calculate your first alternative for an in-the-money call. Step 4 Calculate your second alternative for an in-the-money call.
Step 5 Execute the more profitable alternative. Items you will need A brokerage account holding at least one call option. Tip Be aware of trading commissions.
For simplicity, they were omitted from our examples. If the underlying stock is about to pay a dividend, remember that options do not entitle you to dividend payments, so you may want to execute the call to receive the dividend. Note that exercising an option is the same as executing it. The former rids you of the call, whereas the latter obligates you to create a short position on your call, which is when you borrow the call and sell it for cash, buying it back at a later date to repay the loan.
References 3 Mike Scanlon's Instablog: Resources 3 Options for the Beginner and Beyond: Unlock the Opportunities and Minimize the Risks; W. About the Author Based in Chicago, Eric Bank has been writing business-related articles since , and science articles since Zacks Research is Reported On:More...