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Options
Posted on 1/30/21 at 12:18 pm
Posted on 1/30/21 at 12:18 pm
I've never traded options before, but I'm looking into it and I think I've got if figured out how it works. Can I get someone who buys calls to help a brother out?
If I buy a call contract with a $10 strike price at $5, the contract allows me the option to buy the stock at $10, correct? So my investment, if I exercise the option would be $1000 + $5? If the stock price goes to $15, I've immediately seen an ROI of about 50%?
If I buy a call contract with a $10 strike price at $5, the contract allows me the option to buy the stock at $10, correct? So my investment, if I exercise the option would be $1000 + $5? If the stock price goes to $15, I've immediately seen an ROI of about 50%?
3
Posted on 1/30/21 at 12:28 pm to greygoose
In your example you wouldn't see a profit till the stock is above $15. The call option allows you to buy the stock at $10 but you're paying $5 at the moment for that so your profit calculation is wrong.
You can still make money if the stock jumps or IV shoots up and sell the call (like you would when you close a stock position) at a higher value before its expiration date.
You can still make money if the stock jumps or IV shoots up and sell the call (like you would when you close a stock position) at a higher value before its expiration date.
Posted on 1/30/21 at 12:30 pm to greygoose
You should probably stay away as the option writers win 90%+ of the time. In your example, the $5 is the price per share, and usually options are for 100 shares. So it costs you $500 to buy the option, if stock price goes above 15 at expiration you make money, if below 15 you lose money. That doesn't take into account the fact that you can close out the option prior to expiration as well.
Posted on 1/30/21 at 12:34 pm to Big Saint
quote:Ok, this is where I get confused. The cost of the contract is $5 per share? So the cost upfront would be $500 for one contract?
In your example you wouldn't see a profit till the stock is above $15. The call option allows you to buy the stock at $10 but you're paying $5 at the moment for that so your profit calculation is wrong.
You can still make money if the stock jumps or IV shoots up and sell the call (like you would when you close a stock position) at a higher value before its expiration date.
Posted on 1/30/21 at 12:37 pm to GeneralLee
quote:Yeah, I probably should. I'm just trying to learn about them and how they work.
You should probably stay away as the option writers win 90%+ of the time. In your example, the $5 is the price per share, and usually options are for 100 shares. So it costs you $500 to buy the option, if stock price goes above 15 at expiration you make money, if below 15 you lose money. That doesn't take into account the fact that you can close out the option prior to expiration as well.
Tell me this, can you exercise a call option anytime before the expiration date?
Posted on 1/30/21 at 12:39 pm to greygoose
quote:
Ok, this is where I get confused. The cost of the contract is $5 per share? So the cost upfront would be $500 for one contract?
So if you look at the price of the contract and it says $5.00, that is $5 per share. Break even would be $15 and total price you pay for the call is $500.
If it were to say $0.05 then break even is $10.05 and the price for the contract is $5 when you buy it.
Posted on 1/30/21 at 12:46 pm to greygoose
Yes
Options are really simple. They are contracts giving holders the "option" to either buy or sell at a specified price until a specified time.
As an option owner you can exercise your option up until the expiration date.
As an option writer or seller you have agreed to either sell or buy a specified security anytime the holder of the option wants until the expiration date.
Now there are a lot of traders that worry about things like Delta and Gamma and different strategies like straddles and things but at the end of the day they are simply trading option contracts.
Most options are not exercised early. I did, however, exercise a call option I owned because I wanted to own the stock on the ex dividend date rather than waiting to settle the in the money call latter.
Calls are options to buy. Puts are options to sell.
"in the money" calls means the strike price of your call option is less than the price of the underlying stock. In the money puts mean the strike price of your put is more than the price of the underlying stock.
There are options available on commodities too.
Options are really simple. They are contracts giving holders the "option" to either buy or sell at a specified price until a specified time.
As an option owner you can exercise your option up until the expiration date.
As an option writer or seller you have agreed to either sell or buy a specified security anytime the holder of the option wants until the expiration date.
Now there are a lot of traders that worry about things like Delta and Gamma and different strategies like straddles and things but at the end of the day they are simply trading option contracts.
Most options are not exercised early. I did, however, exercise a call option I owned because I wanted to own the stock on the ex dividend date rather than waiting to settle the in the money call latter.
Calls are options to buy. Puts are options to sell.
"in the money" calls means the strike price of your call option is less than the price of the underlying stock. In the money puts mean the strike price of your put is more than the price of the underlying stock.
There are options available on commodities too.
This post was edited on 1/30/21 at 12:49 pm
Posted on 1/30/21 at 12:58 pm to greygoose
quote:
Tell me this, can you exercise a call option anytime before the expiration date?
If it's an American style option, yes you can. That's typically what you'll encounter with equity underlyings here.
Here's a link that you may want to follow and read before going much further. Learn the definitions, learn the langauge (including the Greeks), learn basic strategies and the reasons and market conditions for doing one strategy over another, learn the consequences of buying or selling and only trade once you have a SOLID handle on what you're doing, along with risk assessment (the most important part). Learn as much about options as you can - and don't just plunk down money to buy an OTM call or put and hope for $ - those are the people I take advantage of in high IV markets.
Good luck to you.
Investopedia - Options
Posted on 1/30/21 at 1:17 pm to JDGTiger
quote:Thanks. I've been reading up. In the case of say AMC. the strike price is $9 and the contract is $6.30. Expiration is 2/5. The stock closed AH at $13.26. Why would someone buy this option when the stock price is lower than the option price? Hedging in case it drops?
JDGTiger
To be in the money, the price would have to exceed $15.30 by Friday, correct? Let's say it goes to $30 on Monday, I could exercise the option on Tuesday. Would I have to put up the total amount of the strike ($900) in order to turn around and immediately sell the stock for $30/share?
Posted on 1/30/21 at 1:43 pm to greygoose
quote:
In the case of say AMC. the strike price is $9 and the contract is $6.30. Expiration is 2/5. The stock closed AH at $13.26. Why would someone buy this option when the stock price is lower than the option price? Hedging in case it drops?
I assume that you're talking about the 2/5 $9 call. Using the AH stock price of 13.45, the $9 call option has $4.45 of intrinsic value (the amount that it's in the money). The rest of its value is extrinsic, largely based on Theta (remaining time value) and the implied volatility of 475.68% (which borders on complete insanity). The expected trading range for the stock as of Feb. 5 is +/-$12.824.
quote:
To be in the money, the price would have to exceed $15.30 by Friday, correct?
It's ITM now. Whether or not the trade becomes profitable depends on how much the stock might rise, or if the implied volatility spikes even further. Remember ALL of the things that affect option pricing.
quote:
Let's say it goes to $30 on Monday, I could exercise the option on Tuesday. Would I have to put up the total amount of the strike ($900) in order to turn around and immediately sell the stock for $30/share?
Yes, if you wanted to be long the stock and had $900 of buying power in your account, you could immediately exercise this option. If you kept the option and the stock happened to soar to $30, your option would have $21 of intrinsic value and with such a move, likely an even greater amount of extrinsic value than it does now - though the deeper an option goes in the money, the more it begins trading $-for-$ like the stock. So in this case, all other things equal, maintaining the option and selling it would likely generate greater profits than exercising the option and being long the stock for that short period of time. And if you just wanted to be long the stock, buying it straight out would be a less expensive move than paying a premium and fiddling with an ITM call option.
Posted on 1/30/21 at 1:53 pm to Jag_Warrior
quote:
Jag_Warrior
Thanks! That's exactly the explanation I was looking for!
Answered all my questions and greatly helped me with making a decision! Posted on 1/30/21 at 1:56 pm to greygoose
No problem. Glad it helped.
Posted on 1/30/21 at 8:34 pm to greygoose
quote:
And if you just wanted to be long the stock, buying it straight out would be a less expensive move than paying a premium and fiddling with an ITM call option.
What Jag_Warrior wrote is absolutely correct.
A few things that many people here miss regarding options is there is a difference between a option trade being profitable and the option being in the money. You don't need the option to go through the strike price to break even unless you hold the option all the way until market close on expiration day. If you buy an option, you can sell (close the position) the option 10 minutes later and be done with the trade if you like. You are not obligated to hold the option until the close when it expires.
I would stay away from any of these WSB names -- GME, NOK, AMC, and BB. The option prices are so jacked right now especially with GME.
Most options that are traded are not exercised. Let's say you bought AMC $15 calls @$4.45. It would cost you $445.00 to own one contract. If AMC hit $30 Monday afternoon, the price of the option would be more than $15 (maybe $17). You could sell to close the option Monday afternoon and you would be done.
Look at this week's GME $800 calls, the last trade was $45.85. This means if the person bought this call, it cost them $4,585.00 for one contract. They don't need GME to get to $800 by 2/5 to be profitable. If GME opens at $425 Monday, then the person should be able to flip it for a profit if they wanted to.
NOK, which the WSBers have not really been able to move like GME and AMC, the $10 weekly calls last traded for 10¢. One contract would cost you $10. If NOK stock gets to $9.00 Monday at noon, someone that purchased those calls for 10¢ should be able to make a nice profit without the stock having crossed the $10 strike price.
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