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How To Buy Gold Options - Investopedia
The xA5 fee you are paying to buy the call option xA5 is called the premium (it&apos s essentially the cost of buying the contract which will allow you to eventually buy the stock or security). In this sense, the premium of the call option is sort of like a down-payment like you would place on a house or car. When purchasing a call option, you agree with the seller on a strike price and are given the option to buy the security at a predetermined price (which doesn&apos t change until the contract expires). xA5
The Dangerous Lure of Cheap out of the Money Options
The maximum risk of buying $5,555 worth of shares is theoretically the entire $5,555, because, while it is unlikely, the stock could go to zero. In our example, the maximum risk of buying one call options contract (which grants you the right to control 655 shares) is $855. The risk of buying the call options in our example, as opposed to simply buying the stock, is that you could lose the $855 you paid for the call options.
The buyer of call options has the right, but not the obligation, to buy an underlying security at a specified strike price. That may seem like a lot of stock market jargon, but all it means is that if you were to buy call options on XYZ stock, for example, you would have the right to buy XYZ stock at an agreed-upon price before a specific date.
If you were buying a long put option for Microsoft, you would be betting that the price of Microsoft shares would decrease up until your contract expires, so that, if you chose to exercise your right to sell those shares, you&apos d be selling them at a higher price than their market value. xA5
Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Before trading options, please read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request.
Of course, once you exercise the options, you have to pay for the stock at the strike price—$55 in this case. But you would do so only if the stock price had risen high enough for the option to be in the money —a term that implies an option is worth exercising because the stock price is above the option’s strike price. The ultimate goal is for the stock price to rise high enough so that it is in the money and it covers the cost of purchasing the options.
Important Note: Futures and options transactions are intended for sophisticated investors and are complex, carry a high degree of risk, and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure Statement for Futures and Options prior to applying for an account. You can also view the E*TRADE Futures LLC Financial Information and Disclosure Documents.
Shorting an option is selling that option, but the profits of the sale are limited to the premium of the option - and, the risk is unlimited. xA5
For strangles (long in this example), an investor will buy an out of the money call and an out of the money put simultaneously for the same expiry date for the same underlying asset. Investors who use this strategy are assuming the underlying asset (like a stock) will have a dramatic price movement but don&apos t know in which direction. What makes a long strangle a somewhat safe trade is that the investor only needs the stock to move xA5 greater than the total premium paid, but it doesn&apos t matter in which direction. xA5
If xA5 you are buying an option that is already in the money (meaning the option will immediately be in profit), its premium will have an extra cost because you can sell it immediately for a profit. On the other hand, if you have an option that is at the money, the option is equal to the current stock price. And, as you may have guessed, an option that is out of the money is one that won&apos t have additional value because it is currently not in profit.