question about buying(and selling) a call option?

Jayhawk328 · Jun 20, 2009

I know how options work, but I am curious about what happens when I sell the option without exercising it. I have not bought anything yet (although I'm close), but I have a hypothetical situation.

Let's say the current price of a stock is $12 and I buy a January 2010 call option with a strike price of $17 for $.50 per call. If I have $2000 will that enable me to buy 4000 call options or just 40 call options because the options come in 100 share increments?

If the price of the stock goes up to $25 (in a VERY optimistic scenario), and I want to sell it WITHOUT having to exercise the option how does that work? I'm guessing the price of that option would increase because the stock price increased, but I wasn't sure if my profit comes from the stock price itself ($25 stock price-$17.50 strike price=$7.50 per call) or if it came from the actual option prices?

I am sorry this is so long, but I think this is a great way to make a profit if you don't have too much money. Any help would be appreciated, thanks.

wartrace · Jun 21, 2009

You could buy 40 at .50 cents each. If the stock climbed above the strike price the value of your option will also rise but not always dollar for dollar with the stock. There is something called the "delta" which indicates at what rate the option will rise with the stock. A delta of .5 means your option will increase .50 cents for every dollar the stock rises. A delta of 1 would mean a dollar for dollar rise.

If you are holding the option and wish to sell you can do that before the expiration BUT you will only get the bid price as when you buy you have to buy at the higher ask price.
What you are able to sell your option for is a factor of the delta & the time premium remaining minus the bid/ask spread. It would be close to the 7.50 difference.

Let me guess the stock without peaking at some options- GE?

u21c3f6 · Jun 21, 2009

Quote from Jayhawk328:

I know how options work, ...

Do yourself a very big favor and buy just about any options book that describes the basics. With all due respect, your questions tell me that you really don't know very much about options. Get a book, read it, and then you will be in a better position to answer your own questions. It will also give you a broader understanding of the options market that you will not get with short answers to your questions IMO.

Joe.

dagnyt · Jun 21, 2009

Quote from Jayhawk328:

I know how options work, but I am curious about what happens when I sell the option without exercising it.

1) You do NOT know how options work. Not even close. The fact that you don't know that 40 options represents 4,000 shares is proof of that truth

2) Educate yourself.

3) Yes, you may sell an option at any time before it expires.. If fact that's what you want to do. It's <b>almost</b> always wrong for an investor to exercise any option.

4) The price of the option - as regards to your question - depends on both the strike price and the strike price.

If you own the 17.5 call, you have the RIGHT to buy shares at 17.5 Because the stock is priced at 25, you have the right (but, again, do not do this, just sell the option) to exercise, buy stock at 17.5 and immediately sell at 25. That's $750 cash in your pocket. Thus, the option is worth at least $750.

Depending on conditions and time remaining, the option may be worth more than $750.

If you own 40 of those, that's a gain of $28,000.

Do yourself a favor and learn what you are doing before buying any options.

Mark
The Rookie's Guide to options

Jayhawk328 · Jun 21, 2009

I figured I would look pretty dumb asking these questions, but I really do appreciate you guys taking the time to answer these petty questions. I did say that I am "thinking" about investing in options, but I never said I was for sure going to do it. I obviously have a lot of work to do before I decide to do anything. Thanks again guys, you've been a great help!!!

dagnyt · Jun 21, 2009

Quote from Jayhawk328:

I figured I would look pretty dumb asking these questions, but I really do appreciate you guys taking the time to answer these petty questions. I did say that I am "thinking" about investing in options, but I never said I was for sure going to do it. I obviously have a lot of work to do before I decide to do anything. Thanks again guys, you've been a great help!!!

Options are not complicated - but there really is a bit to learn before getting started.

best of luck

Mark

bebpasco · Jun 21, 2009

Quote from Jayhawk328:

I figured I would look pretty dumb asking these questions, but I really do appreciate you guys taking the time to answer these petty questions. I did say that I am "thinking" about investing in options, but I never said I was for sure going to do it. I obviously have a lot of work to do before I decide to do anything. Thanks again guys, you've been a great help!!!

Check out the CBOE & OIC (888-OPTIONS) websites. There is a wealth of free info on options from basic to advanced. They have seminars online and, periodically, in large metropolitan areas.

wartrace · Jun 21, 2009

Quote from Jayhawk328:

I figured I would look pretty dumb asking these questions, but I really do appreciate you guys taking the time to answer these petty questions. I did say that I am "thinking" about investing in options, but I never said I was for sure going to do it. I obviously have a lot of work to do before I decide to do anything. Thanks again guys, you've been a great help!!!

No, you would look pretty dumb asking- "I placed an order for 4000 options and it cost me 20,000 dollars, I thought they would only cost 2000".

They say the only dumb question is the one that isn't asked. I agree with the other respondents- study, study, study. Options are a great opportunity if you know what you are doing.

spindr0 · Jun 21, 2009

Quote from u21c3f6:

With all due respect, your questions tell me that you really don't know very much about options. Get a book, read it, and then you will be in a better position to answer your own questions. It will also give you a broader understanding of the options market that you will not get with short answers to your questions IMO.

Oh pshaw! Buying low delta options and making lots of quick money is really as easy as a former girlfriend of mine going to the track with me and picking all the winners based on the color of the jockey's tunic