Instructions

Bet that a stock will rise by purchasing a call option. If you own a call option, you have the right to purchase the underlying asset at the strike price. You don’t have to exercise this right unless it is profitable. For example, say you buy a call option for stock S, currently trading at $10 per share, with a strike price of $12 at a premium of $0.10 for a total cost of $10. If company S remains below $12 you won’t exercise your option, but if it goes above $12 you will. Your profit, if you sell the shares right away, is the total value of the shares above $12 minus the $10 you paid for the contract.

Profit from selling options. A slightly more advanced, and risky, strategy is selling options. When you sell an option, you must have a margin, either reserve funds or a line of credit, to cover the potential cost. If you buy an option your risk is limited to the cost of the option. When you sell an option you get the premium immediately, but if the option is exercised your risk is either unlimited (for a call) or high (if you sell a put, the worst that can happen is the stock falls to zero).

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