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Technology Stocks : 3Com Corporation (COMS) -- Ignore unavailable to you. Want to Upgrade?

To: Mark who wrote (17474)	6/16/1998 2:35:00 PM
From: Chris Anderson	Read Replies (1) \| Respond to of 45548

Mark, I did not notice a response to your question, which is no surprise given all of the meaningless drivel (sp?) that appears on this thread. Now that I have taken that cheap shot at our fellow thread mates, I will attempt to answer your question. A call works like this: A person who buys a call pays for the right to buy a stock later at a given price. You are right when you say they are betting the stock price will rise. An example: Let's say stock XYZ currently trades at $45 a share right now in June 1998. You have reason to believe the stock will rise in price so you investigate buying an option. You learn you can buy a call with a strike price of $50 with an expiration date of say, November 21, 1998. The cost of the call is say $5. You buy the call. What this means is you have the right to buy the stock at $50 any time before November 21, 1998. You are betting the stock will rise to above $50. Basically 3 things can happen: 1) Let's say the stock rises to $60 by October. You decide to exersize your option. Remember, you have purchased the right to buy the stock for $50. So, you buy for $50 and immediately sell on the open market for $60. You net $10 - $5 = $5 per share. By the way, calls are bought and sold on lots of 100, called "contracts". One contract is the right to buy or sell 100 shares. 2) Let's say the stock price stays below $50 all the way through November. Basically what happens is that you are out your money. Sure you could exersize your option and buy at $50 but that would be crazy since we have already postulated the stock price is BELOW $50 on the open market. 3) Now let's say the stock rises to some lofty level or sinks to some real low level. The underlying option, which you own, will rise or fall in value also. Sometimes it will rise to a considerable level. Rather that exercising the option, you could simply sell it at a profit (or perhaps a loss). Options are traded just like stocks. Once you buy one, you are not stuck with it, you can sell it! (as long as it is before the expiration date) Hope this helps, good luck! Chris p.s Now that you have learned how to buy a call, you may be interested in how to sell, or "write" a call. Perhaps someone else on this thread will kind enough to explain.