Making Money from Puts and Calls??

C

cashclay

Hi i was just watching this youtube video which really confused the hell oput of me. Am i, if purchasing a call option, making money of the bids and ask difference or the difference in the strike price??
 
Intrinsic value is the the difference between the in the money strike price and the underlying price. For example, a $10 Strike Call would have an intrinsic value of $1 if the underlying price was $11, a $12 call would have zero intrinsic value. Both options likely have a market price of more than there intrinsic value. I.e the $10 Strike will cost $1.50 and the the $12 strike will have a market price of $0.35. The value above the intrinsic value is based on the time remaining to option expiration and the implied volatility of the market.

The bid-ask spread is an artifact of there being a market, just like there is in the underlying market. You can make money off of thee bid ask spread if you are market making or scalping, you can make money off the difference in strike prices (intrinsic value) if you are making directional plays, and you can make money off of changes in volatitliy of you are making a volatility/time play.... So the answer to your question is both or neither.

Options are much different than the underlying. There is an additional component: time

I recommend you get the Nattenberg book: Options Volatility and Pricing before you even consider putting an a real money options trade. If you don't understand the content of the book... stay away from options
 
so if i bought a call option of 10$ and the strike price goes to 11$ and i sold i would make 1$ or if i bought a call option for ask price of 10 cents and then sold it at a bid price of 20 cents would i be making 10 cents?
 
If you had a $10 Strike price CALL option, and the underlying went to $11 and you held the option until expirtation (dont do this) You would have $1 Profit (per share 1 option = 100 shares) minus whatever you paid for the call option .

So if the volatiilty was high when you purchased the option... you could still lose money, even if the direction you picked was right
 
oh wow i didnt know that. there was nothing in my book on this. So for example if i had paid an ask price of 1.20 but the strike price had only moved 1 then i would lose money. is this correct?
 
If you bought a $10 call for $1.20 ( $120 due to x100 multiplier built into options), and the underlying was price was $11 at expiration, you would make $100 - $120, that is: You lose $20
 
Unless you have a good reason to do so, you should NEVER take an option into expiration though... You should sell it before expiration. As time until expiration goes to zero (the "limit", if you are a calculus guy), the price of the option will go to its intrinsic value. You'll also notice that the implied volatiilties and bid-ask spreads can get goofy... this is because the market makers are trying to make a quick buck off of people liquidating options before expiration.... so liquidate EARLY if possible...beat the crowd.
 
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