How to Buy Stock Options? Ok so you know what they are, but now you want to know how to purchase stock options. Well you are going to have to open up a brokerage account first that allows you to buy and sell options.
Once you have an account the next step is to figure out which option you actually want to buy. Each month has its own option chain which your broker will display somewhere on their website.
Below is an example of how it will look, but let us go over it a little bit first. Here are a few terms you will need to understand to buy the right option.
Middle of the chain is grey, it tells you the strike price you are buying.
Left side is the call option side giving you the right to buy the stock at a certain strike price.
Right Side contains the put options which give you the right to sell a stock at a certain strike price.
ASK is the price you pay if you buy the option.
BID is the price you get if you sell the option.
So, let us say that you want to buy a call option for this stock (symbol: CAT). Currently the stock is trading at $60.40 and it is November 16, 2009. If you want to buy the right to buy the stock at $60 by the 3rd Friday of December you would use the December option chain.
By going down the middle until we find the $60 strike price and moving to the left until we get to the ASK price we find out that it cost $2.80 to buy this option. Most brokers will let you click on the option that you want to buy and the order forum pops up.
But now that we know how to buy stock options let us look at the other side of it, exercising stock options. In order to buy common stock with options you must go to your list of active trades click on your option and hit exercise.
This will allow you to buy the stock at the strike price of your option (or sell it at the strike price if you bought a put). In addition to that some brokers will automatically exercise your option during expiration Friday if it is in the money.
For example my broker, Thinkorswim will automatically exercise the $60 option during expiration Friday if the stock is at least $60.05 or I say otherwise.
It is also important to note that you can profit from your option without exercising stock options. If we look back at the same option chain and this time we already owned say the $50 call option, we could exercise it and buy this $60.40 stock for $50, or we could simply sell it for the BID price, which in this case happens to be $10.65.
Now you know how to buy stock options and exercise them, but remember that they should be handled with caution as they can be very risky.
