How to Buy Stock Options

Stocks can be a gamble

How to Buy Stock Options. When investing in the stock market the more an investor can lessen his or her risk on a given stock purchase the better. This is where stock options come in. Rather than buying the actual stock, an option investor pays only a small percentage of the stock price for the option to buy or sell the stock at a later date. There are steps to this process that any investor should know.

Step 1

Understand the different type of options that are available. The two main types of options are puts and calls. Puts give the buyer an option to sell the underlying stock at a certain price during a given period. Calls allow the buyer of the option the ability to buy the underlying stock at a certain price in a given period.

Step 2

Track and research the performance of the underlying stock. If, after the research, you expect the stock to rise in price, you should consider purchasing a call stock option. However if you expect the stock price to fall, the put stock option is the correct purchase. There are many permutations of these basic options principles, but these are the trading options for beginners. In the option business, they call this directional trading.

Step 3

When you see, call or put a price of $2.00, the cost of this option is not $2.00 but $200.00. This is because stock options sell in lots of 100 share options. This is a common mistake for beginning options investors.

Step 4

Decide which stock option you want to purchase and if you want a put or call option on the underlying stock. Again, a put is option to sell and a call is option to buy the underlying stock. You will need to contact a broker or visit an online option-trading site to place the order. See Resources below for information.

Step 5

Buy the stock options for the given market price. Be sure to check the strike date of the option. The strike date is when the option expires. If you do not exercise by this date, it expires and you lose your investment. It is usually a good idea buy to stock options with the latest strike date. However, sometimes the stock option will be cheaper the closer it is to the strike date. Despite being cheaper, these short strike dates carry more risk.