How To Buy An Option


This is a step-by-step write up of how to buy an option using Dividendium's Options Trading Service.

My broker is TradeKing, so that's where these screenshots come from.

The terms and general layout for placing an options trade will be pretty much the same at any broker.

The Buy Email


When you get a "Buy" email from Dividendium's Options Trading Service, and click the link to view the trades, the data on Dividendium will be laid out like this:



This is telling you to buy a Call Option on that stock, at that specific Expiration Date, with that Strike Price, at or less than that Price.

Now, let's go over some of this stuff...

What's a Stock?


Just in case you're not familiar with what stock is...it's a partial ownership of a company. Some teeny tiny amount of the company. In reality it doesn't mean anything unless the stock pays dividends, in which case you're entitled to be paid the dividend like anyone else that owns that stock.

What's a Call Option?


I'll explain what a call option is using GIS from above as an example.

Think of the situation where you want to buy a house. You found the house you want to buy, but you need time to get the loan lined up. So you get an agreement in place with the house seller (an option) to buy the house at a given price in the next 30 days. Which means no one else can buy the house in the next 30 days, and you can buy it for that given price any time before that 30 days is up. Call options are almost exactly like that with the house being a stock.

So with the Call Option on GIS above, you want the option to buy GIS stock between now and 1/15/2016 (an expiration date 2 years from this writing...considerably longer than the 30 day window for the house option example), and you want to pay $70 for each share of stock (a share is the smallest unit of stock you can buy generally) ($70 is the "given price" that you are buying the house at).

Two pieces here that don't match the house buying analogy: "Contracts" and "Limit Buy Price".

A single "contract" allows you to buy 100 shares of stock at the strike price. 3 contracts (from the example) allow you to buy 300 shares of stock.

"Limit Buy Price" in this case is $0.57. This is the amount you are willing to pay for this privilege of being able to buy the stock at any time between now and 1/15/2016 for $70. In the house analogy, this "privilege" is usually given for free.

Why would you pay for this privilege here? Consider what happens if the GIS stock rises in price to $170 on 12/15/2015. You could "exercise" your option, pay $70, receive the GIS stock, and then instantly turn around and sell it for $170, and pocket $100 per share. This means that the guy who owned the GIS stock lost out on the $100, and you got it instead. That's why he wants $0.57 per share...to offset the risk of that happening even though he doesn't really think that's going to happen, and why you'd be willing to pay it since you think it's more likely to happen than he does.

There's one final piece here. If GIS did rise to $170, and you could do this whole "exercise, buy, sell, get $100" thing...why go to all that trouble? Why not just sell the option to someone else for $100 and let them do that if they want to, or they can hold it for the remaining month until 1/15/2016, and do something any time before then. So that's what we do. We sell the option when it gets to a high enough price.

Now, on to actually buying.

The Example Purchase


I'm going to use GIS from above as an example to show you exactly what it looks like to buy an option.

Step 1


To buy an option, first go to Trading –> Options –> Leg: Basic.



Step 2


That gives you this screen. Now you enter the Stock Symbol "GIS".



Step 3


So now the screen looks like this. Now Click "Go".



Step 4



Here's the trade data again from above:



In the order form that is now showing you enter:

Expiration Date. For this example that's 1/15/2016, but here they say "Jan 15 2016" in the dropdown.

Strike Price. For this example that's $70.00, but here they say "70" in the dropdown.

Type. We want Call Option, so click the "Call" button. The order form doesn't seem to indicate that Call is selected after clicking it, but in the "Quote" area at the bottom of the screenshot, it will register "CALL".

Select "Buy to Open".

("Buy to Open" means, "I want to buy to start this trade".

"Sell to Close" means "I want to sell something I bought and finish that trade".

"Sell to Open" means "I want to sell something to start this trade".

"Buy to Close" means "I want to buy something I sold and finish that trade".

You will only ever be using "Buy to Open" and
"Sell to Close" for this service.

"Sell to Open" and "Buy to Close" usually involve selling something you don’t own, and buying it back cheaper before anyone notices that you don't own it....and keeping the difference. It's interesting, but way too risky for my taste.)

Contracts. Enter "3" for Contracts. (A contract is 100 shares of stock.)

Limit Buy Price. Select "Limit" and in the textbox that appears enter "0.57" for $0.57 per share.

Select "Day Order". (We only want this buy order to last through the end of the current or coming trading day. If no one else wants to sell at that price, then it won't get executed, and it will just be canceled...which means nothing happens and it doesn't cost you anything. "GTC" stands for "Good Til Canceled", so those buy orders stay active until they are executed...although I think they actually die if they are over 30 days old. Either way, Dividendium's recommended buy price is only a recommendation for that day...the next day it will recalculate the price. Note for a "Day Order" this means you can place it on Friday night, and it will still be good on Monday, and will cancel at the end of trading on Monday.)

Select "None" for Qualifiers ("All or None" means if you can't buy all the stock you want right then, then don’t buy any. This would be like if you were buying 1000 shares, and didn't want to buy only 800. For these orders, I use "None" because it doesn't matter for our situation if the trade gets split up.)

Nothing selected for Advanced Orders. (This is for if you wanted to make your purchase contingent on some other purchase happening.)

Your screen should look like the below screenshot.



Step 5


Click Preview Order. You should now see the below screenshot.

Important thing to notice here is the "Est. Trade Value". It should read $171.00.

You are placing an order for 3 contracts of a call option, which is quoted per share ($0.57), but is purchased in blocks of 100 shares, so the actual cost is 300 * $0.57 = $171.00.



Step 6


Click Place Order.

What happens now depends on what time it is.

If it's during the time that the market is open (9:30am-4pm EST), then your order will be processed as soon as someone else is willing to sell their option at that price.

If it's during the time that the market is closed, then your order is queued up and will be sent when the market opens, and again will be processed as soon as someone else is willing to sell their option at that price.



If someone is willing to sell, then you buy, and you get an email from TradeKing saying you bought.

And you will have purchased your first option!

Then any day where you get an email from Dividendium that says "New Options To Buy", click the link and go place those orders just like this.

Email me at aleks@dividendium.com if you have ANY questions...even if you think they are dumb. I'm happy to answer...and I can update this write up to help anyone else who has the same questions.