Following Up after Buying a Call Option

If you haven’t dealt with call options before, you need to be aware of a few ground rules. Here’s what you should do after you buy a call option:

  • If the underlying stock tanks, the best course is to sell the call option and cut your losses.

  • If the option rises in price, especially if it doubles in a short period of time, take some profits.

  • It’s better to sell a call than to exercise it because the commission costs to buy the stock when you exercise the call are usually more than what it costs to sell the option. If you then turn around and sell the stock, you’ll pay more of a commission at that time as well.

  • If you buy several options and the stock rises significantly, you can take partial profits by selling a portion of your overall position. For example, if you bought five calls and the position is profitable, you can sell three calls and ride the profit train with the remaining ones.

  • If you decide to do nothing, you can lose everything at expiration. But if you sell your profitable initial position and stay out of the options in that particular stock, you can keep your profit. (You may find that a good profit in your pocket is better than a great one that may never come.)

At the beginning of an options trading strategy, keeping it simple is the best way to go. As you become more experienced, you can start making more sophisticated bets.

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