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I've been thinking about buying options for the first time - nothing crazy and not a lot of money, but I'm mainly interested in the process. I have been a fairly conservative buy and hold investor for 10 years or so now and have done reasonably well. The MF has really helped me a lot in that time.

I understand the basic principle of buying put and call options - for a call option, you're purchasing the option, but not the obligation, to buy at a set price at or before a designated date in the future, hopefully for a price lower than what the stock is at that time. You pay the cost of the contract(s) up front, then at the expiration date of the contract either allow the contract to expire (and lose only the cost of the contract) or exercise the option and buy the stock at the designated price. You may then either continue to hold the stock or you can sell it immediately and pocket the difference between the contract price and the current price. Right?

My questions:

1. Is the benefit of simple call or put options as described above simply the ability to control a large block of stock with less money? Is that it? It would seem to me that if you were absolutely convinced a stock were going to rise, simply buying the stock outright would be cheaper. Plus, if you're right and the stock does rise and you want to exercise the option, you have to come up with that big block of money to buy the stock anyway. So why not just buy it up front and save the commission?

2. My online broker allows for the purchase of options but the terms are confusing. There are 4 options, once you determine the option chain for the ticker symbol and the expiration date of the contract: Buy to open, sell to open, buy to close and sell to close. Can someone explain these 4 options and how one would actually go about purchasing say 5 call contracts for stock ABC, expiring in January 2007, and then exercising option in January?


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