How to buy an option

Most traders who buy options do so for two reasons: to hedge risk or to speculate on a stock’s price.

If you want to buy an option contract, you enter an order with your broker called “buy to open.” In other words, you are purchasing that option contract from the writer or another buyer who no longer wants to hold on to it.

An option contract is normally for 100 shares of the underlying stock. Therefore, when you place an order for a single contract, you are really placing an order for the call or put option that can be exercised on 100 shares.

As a result, the price of the option contract needs to be multiplied by 100 in order to determine the price you will be paying for that contract.

If you no longer want to hold an option contract, you can sell it to other willing buyers. This is called a “sell to close” order.

Some traders use fundamental or technical analysis tools to make option trading decisions, basing them on either the intrinsic value of options or by interpreting technical buy and sell signals. As you become better acquainted with options trading, you will find ways to apply these tools to your own trading strategy.