Common sense tells us that if we were to buy some shares for $ 20 each and they went up to $ 22, then we would make a $ 2 profit. This is called Stock Trading and many traders make money daily using this strategy to generate an income.

To trade stocks however, you need to be able to buy the shares in the first place, and not everyone has that amount of cash available to them. Not to mention the fees generally associated with larger sums of trading transactions.

Stock Options are a highly effective trading vehicle that will allow you to make money on the stock market no matter which direction the share price is heading, and at a fraction of the cost of buying shares outright. So you can trade with smaller amounts of money for a higher rate of return (due to leverage).

Call Options are contracts that relate to a particular stock, and give you the right to buy that stock at a fixed price, on or before a fixed date, should you wish to do so.

You would buy Calls if you had a Bullish view on a particular stock. That is, you expected the price to go up.

So when the share price goes up you stand to make a profit on your Call Option.

Options Trading with Calls is the process of buying Call Options in a rising market, only to sell them later at a profit.

Let's say it is April and XYZ shares are trading at $ 30 each. We could buy a $ 32 June Call Option to purchase 100 XYZ shares for $ 300.

At any time before expiry (June) of our option we could exercise our right to buy 100 XYZ shares at $ 32 each. This means we have 2 months in which the share price could rise above $ 32.

Once our call is In The Money (share price is above our strike price of $ 32) we could exercise our option to purchase the shares for $ 32 if we choose to, and then sell them at the market price.

$ 4000 (our sell price to the market $ 40 x 100) -

$ 3200 (our purchase price using the option $ 32 x 100) -

$ 300 (initial cost of options)

= $ 500 profit

But I did say your cost when Options Trading would be less than trading the actual stock didn't I?

As the price of the stock increases, so too does the value of our Call Options. Rather than exercising our right to buy the stock, we could SELL OUR CALL OPTIONS to someone else for a profit.

And if the share price had risen to $40, and the option contract value had increased to say $ 900, then we would stand to make a profit of $ 600 using only $ 300 of our own money.

When Options Trading, your maximum potential loss is limited to the amount you initially pay for your option contract. And actually, with the right strategies and money management rules in place, your potential loss can be much less than this.

I remember meeting with a lot of negativity from relatives and friends when I began Options Trading. They believed trading options was an easy way to lose money and far too risky.

But over the years I have realized that buying a car is a much easier way to lose money because you are guaranteed to incur a loss when it depreciates in value, but people just don't react the same way when you tell them you are buying a new car.

ANY purchase or investment will have an associated risk if you don't know what you are doing. For this reason I would only recommend someone consider options trading after completing the right educational avenues and using sound money management rules.