Managing risk with calls

If you're interested in buying a specific stock because you think its price is going up, but you'd prefer to have your expectations confirmed before you lay out the full purchase price, you can buy a call option on the stock.

If the market price goes higher than the strike price, you can exercise your option and buy the stock for less than the current price. Or you can sell the option to recover the premium you paid, and perhaps make a profit on the sale.

But you must be prepared for the risks that come with trading options of any kind. For example, even if the stock price rises as you anticipated, if it doesn't hit or exceed the exercise price within the duration of the contract, your option could expire worthless. Or, the stock price could drop instead of rise, leaving the option worthless as well.

You can help limit certain risks in options trading by buying only in the money calls with several months — say three or four — left until they expire. If you buy options that expire sooner, there's a greater risk that the stock price won't exceed the exercise price. As you gain experience in trading options, you may choose to use some more complex strategies.