long term option in ETF

O

osho67

Suppose I buy 100 call options in DIA strike price 70. Expiry Jan 2011. The premium quoted is 21 so I pay $2100 for those options.

In Jan 2011 if DIA has not moved or is less than 70 I will lose my premium paid. But if DIA is 100 I will make a profit of 30X100X 100
(i.e. 100 contracts and each contract is equal to 100 shares.)

My profit will be $300000. Which could be quite possible.

Am I correct in these calculations ?

Comment much appreciated. Thanks
 
You forgot to back out the cost of the calls from your "profit" calculation. In addition, you are using "1" as the quantity in the purchase sentence, but "100" as the quantity in the profit sentence.
 
Quote from osho67:

Suppose I buy 100 call options in DIA strike price 70. Expiry Jan 2011. The premium quoted is 21 so I pay $2100 for those options.

In Jan 2011 if DIA has not moved or is less than 70 I will lose my premium paid. But if DIA is 100 I will make a profit of 30X100X 100
(i.e. 100 contracts and each contract is equal to 100 shares.)

My profit will be $300000. Which could be quite possible.

Am I correct in these calculations ?

Comment much appreciated. Thanks
More...

No you are incorrect.

First, by paying $21, you pay $2100 per contract, not $2100 total.

Your cost would be $210,000.

Next if the option is worth 30 when it expires (i.e., the underlying is 100), you gain $9 per option ($30 minus $21).

For 100 contracts, $90,000.

Mark
http://blog.mdwoptions.com/options_for_rookies/
 
Quote from JBfinancial:

The option has approximately $11.00 of extrinsic value (time decay value), which would be lost if you sold the option at expiry.
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Thanks I realised what I was doing wrong. See Marks post below
 
Quote from Random.Capital:

You forgot to back out the cost of the calls from your "profit" calculation. In addition, you are using "1" as the quantity in the purchase sentence, but "100" as the quantity in the profit sentence.
More...

I was so excited at the profit potential I was not writing correctly. I have understood my mistakes. Thanks
 
Quote from dagnyt:

No you are incorrect.

First, by paying $21, you pay $2100 per contract, not $2100 total.

Your cost would be $210,000.

Next if the option is worth 30 when it expires (i.e., the underlying is 100), you gain $9 per option ($30 minus $21).

For 100 contracts, $90,000.

Mark
http://blog.mdwoptions.com/options_for_rookies/
More...

Thanks Mark, much appreciated. I overlooked the multiplier factor. Would it have been nice but it was too good to be true. I donot have capital even for 10 contracts.
 
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