Call options buying

unconventional wisdom said:
i don't have "option" in my user name, so maybe you know more than me on this topic. what's untrue about my post? I'm genuinely curious for an explanation
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Options can and do get exercised before expiration. Very common for DITM options with small extrinsic value, sometimes dividends can be played exercising early. Then there's situations like with GME and Hertz, where options with extrinsic value get exercised early for many reasons, for example because there's no available shares to short, and simply noobs exercising them because they don't understand what they're doing.

Obviously this isn't the case with European options.

If you don't want to get assigned, avoid selling near D1 close to expiry. If you however get assigned on your options with lots of extrinsic value, then you should celebrate with a beer.
 
cashclay said:
Now im confused again lol. Are you talking about the premiums? If the BID / ASK is 1 and 2$ and I buy a call option at 1 $. If the stock moves in my favour to BID/ASK at 2 and 3$ do i only make 1$ * 100 shares?

I thought it was the difference that the strike and stock price * 100 shares(1 contract) - premium fees.
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If you place a limit order to buy one call option, and you get filled at a price of $1.00, that means you are paying $100.00. The quoted price of the option is per share, and the option is associated with 100 shares of stock.

So if you buy a call option for $1.00, and then you sell it for $2.00, you actually paid $100.00 and when you sold it you get $200.00. So you have a profit of $100.00. This example does not include your broker's commissions.

I think you're getting yourself really confused with terminology. Note that in the example I just provided, I did not use the words bid, ask, or premium. I also did not say anything about the price of the stock. All I did was explain the prices of the options.

The word premium has two different meanings. Sometimes it is used to refer to the total price of an option. In other contexts, it is used to refer to the difference between the intrinsic value of the option and actual price at which the option is trading.

Do you understand the concept of instrinsic value?

If the stock price is $48.00 per share, and I own a call option with a strike price of $45, can you tell me what the instrinsic value of that option is? What about a call option with a strike price of $50?

BMK
 
cashclay said:
Now im confused again lol. Are you talking about the premiums? If the BID / ASK is 1 and 2$ and I buy a call option at 1 $. If the stock moves in my favour to BID/ASK at 2 and 3$ do i only make 1$ * 100 shares?

I thought it was the difference that the strike and stock price * 100 shares(1 contract) - premium fees.
More...

At this point, I suggest that you reformat and delete that part of your brain holding information regarding options trading.

Information available on options trading is generally very poorly presented. And often just trash. So the fault is not all your own.

The issue here is that options trading can be as simple as buying a contract at a certain price, and selling it at a different price. Period. That's all there is too it, in terms of the mechanics of entering and exiting the trade.

However, underlying the simple mechanics, things can get very complex when it comes to actually valuing the options, and selecting a contract that suits your objectives.

Thus, I suggest you follow the great advice given earlier, which is not to enter any options trades until you fully understand how options are valued, what can change that value, and the potential risks.

Good luck.
 
BMK said:
If you place a limit order to buy one call option, and you get filled at a price of $1.00, that means you are paying $100.00. The quoted price of the option is per share, and the option is associated with 100 shares of stock.

So if you buy a call option for $1.00, and then you sell it for $2.00, you actually paid $100.00 and when you sold it you get $200.00. So you have a profit of $100.00. This example does not include your broker's commissions.

I think you're getting yourself really confused with terminology. Note that in the example I just provided, I did not use the words bid, ask, or premium. I also did not say anything about the price of the stock. All I did was explain the prices of the options.

The word premium has two different meanings. Sometimes it is used to refer to the total price of an option. In other contexts, it is used to refer to the difference between the intrinsic value of the option and actual price at which the option is trading.

Do you understand the concept of instrinsic value?

If the stock price is $48.00 per share, and I own a call option with a strike price of $45, can you tell me what the instrinsic value of that option is? What about a call option with a strike price of $50?

The intrinsic value would be 3 and 2$. So If the stock is at 50 and I hold 1 contract and sold it would I be making 200$? Because of the intrinsic value is 2$ and because of the 100 shares in 1 contract.
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BMK said:
If you place a limit order to buy one call option, and you get filled at a price of $1.00, that means you are paying $100.00. The quoted price of the option is per share, and the option is associated with 100 shares of stock.

So if you buy a call option for $1.00, and then you sell it for $2.00, you actually paid $100.00 and when you sold it you get $200.00. So you have a profit of $100.00. This example does not include your broker's commissions.

I think you're getting yourself really confused with terminology. Note that in the example I just provided, I did not use the words bid, ask, or premium. I also did not say anything about the price of the stock. All I did was explain the prices of the options.

The word premium has two different meanings. Sometimes it is used to refer to the total price of an option. In other contexts, it is used to refer to the difference between the intrinsic value of the option and actual price at which the option is trading.

Do you understand the concept of instrinsic value?

If the stock price is $48.00 per share, and I own a call option with a strike price of $45, can you tell me what the instrinsic value of that option is? What about a call option with a strike price of $50?

Im just confused as to where I would make the money . Is it in the difference of the BID /ASK or is in the intrinsic value of the stock . If the BID/ASK was 1$ profit and the intrinsic value of the strike and stock price is 2$ would that mean I make 3$ in total??
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cashclay said:
The intrinsic value would be 3 and 2$.
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The intrinsic value of an option is represented by one number--not two numbers.

If the stock price is $48.00 per share, and I have a call option with a strike price of $45.00, then the intrinsic value of the option is $3.00 per share, which is equivalent to $300.00 (because $3.00 x 100 shares = $300.00).

If the stock price is $48.00 per share, and I have a call option with a strike price of $50.00 per share, the intrinsic value of that option is zero.

Intrinsic value is a core concept that stands on its own, and it has nothing do with calculating how you "would make the money." You cannot determine "how much you would make" unless you know the price you paid for the option and the price that you sold it for. And those two prices are completely independent of the intrinsic value.

For this discussion--let's say maybe for the next 29 minutes or so--you need to try to completely forget about bid and ask. Bid and ask are an important concept, but they are not relevant here. That is a separate conversation. So try to put that out of your mind.

Suppose there is a riding lawnmower available for purchase at Home Depot, and the price is $5,000.00. Now suppose I have a coupon that allows the bearer to buy that riding lawnmower for $4,300.00.

Now suppose I bump into you in the parking the lot at Home Depot, and you tell me you're going to buy the riding lawnmower. And I say, "Hey, I've got a coupon you can use. Wanna buy the coupon from me?"

What is the intrinsic value of my coupon? How much is my coupon worth?

This is certainly not a perfect analogy. The coupon is not a contract, and it is not an instrument that can be bought and sold on an exchange through a broker. And there are other reasons that it's not an exact fit. But it illustrates the concept of intrinsic value.

In this example, can you tell me the intrinsic value of the coupon, expressed as a single dollar amount?

And why are you putting a dollar sign after the number? Are you in the USA, or somewhere else?

BMK
 
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Yes Im an American, however I reside in South Korea. Wow thank you for the clarification . I was confused because in stocks usually you buy or sell at the Bid/Ask and the difference is in that is your profit. Now I see that options is the difference in Strike and Stock price fro your profits. I really thank you for your care and time to explain all these things to me.
There are a lot of good people on this forum and you are an perfect example . I really do I one day can help you as you have helped me.
 
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