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Can call options make money over the rest of 2011?

I think the stock market will rise in the second half of this year and wonder how I can make money out of this belief? I have heard of call options but don’t really understand them. Could you pass comment on my prediction and explain how I could use a call option?

You’re right – when you think a market or a share is heading up, you can buy a call option.

By buying a call option you have the right to purchase the underlying futures contract at the strike price anytime before the contract expires. So if the strike price was, say, $2 and it moves to $2.50, you can cash in your option and pocket the gain.

An option has a set date of expiry and each contract will clearly tell you this. The critical questions to think about are, how long do you want to play for, how much money do you want to punt, and how far up do you think the price will go? You also need to think about the duration of time you plan on being in the trade.

If you think, say, gold will move higher over four weeks, you will want to buy a gold call option with at least four weeks of time remaining on it.

You wouldn’t want a long-dated option if you think the move will be short-term, and a longer-time option will be dearer, so the time issue is important.

Experts suggest you buy an option with about 30 days more on them than you think you need to make your money.

I recommend you go onto the internet and do some reading and then talk to a couple of brokers and get as much info about the pros and cons of options trading. If you make a good call, it could mean a small deposit or premium for a nice return.

Of course, if you make a wrong call, you will only blow your deposit on the option and that’s the appeal of this risky investment strategy. The best thing about options is that you have the right but not the obligation to buy or sell an asset at an agreed price within a set period of time.

One last thing, let me repeat, do lots of homework and don’t get too greedy.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Monday, June 27, 2011

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