Stock Options allow us to make money in the stock market, whether it's going up or going down. When Options Trading in a rising market, Call Options offer the trader excellent profit potential.

A Call Option is a contract that relates to a particular stock or share and owning a CALL OPTION gives you......

THE RIGHT, (but not the obligation) TO BUY A FIXED NUMBER OF THOSE SHARES AT A FIXED PRICE ON OR BEFORE A FIXED DATE.

You would buy Call Options if you had a Bullish view on a particular stock because they give you the right to buy shares.

Strike price or the fixed, pre-determined price at which you can buy the shares if you wish to do so. This price cannot be changed throughout the life of the option.

Expiry The date at which the option contract expires. This is a fixed date and cannot be changed throughout the life of the option. After this date the option contract is worthless.

Exercise A term used when referring to the process of fulfilling the option contract and buying the shares. This can be done any time up to and including the expiry date.

Premium This is the amount you pay for the option contract. Each stock has set strike prices for trading and the amount you pay for each is dependant on where the strike price is in relation to the current share price.

In the U.S a single option contract relates to 100 shares and on the Australian Stock Market one contract relates to 1,000 shares.

Stock Options give you control over shares at a fraction of what it would cost to buy the actual stock.

Let's say XYZ stock is currently trading at $ 15.00. To buy these shares would cost you $ 15.00 each whereas $ 1.50 might buy you an XYZ Call Option that would give you control over XYZ stock.

As part of an Incentive Scheme:

Quite often business owners will give their employees call options over the company they work for as part of their employment agreement or as an incentive.

The idea behind this is that the employee may feel a loyalty as ‘part owner' in the company and they can benefit from the ownership of a Call Option in two ways.

As the company stock price increases, so will the value of the call option.

The employee could do one of two things:

1) They could sell their option and take the profit.

or

2) They could exercise their option and buy the shares at the strike price.

They could then sell those shares at the current market price. The difference between the strike price and the current trading price would be their profit.

However if the stock price does not increase or even falls, then the option will expire worthless and the employee will have no holdings in the company.

As part of an Income Strategy:

The most common use of Call Options is to trade them for profit in a rising market. This strategy involves buying a Call to sell at a profit once the share price has increased (before expiry).

This is called Short Term Trading and is a highly effective way to generate an income from shares using only a fraction of the money you would need if you were to buy the shares themselves.