question from a beginner

[newoptionsboy77]

Hi,

I'm new to options trading and have a question. If a stock is selling at $40/share, why would anyone want to buy a call option with a strike price of $15? How can one profit from this? Shouldn't they buy a call with strike price of 40 or 45?

Also if a stock is selling at $120/share and someone buys a call option with $135 strike price, will they profit if the stock goes to $125? or will they need to wait if the stock rises to more than 135 a share?

thanks,
newoptionsboy77

 

[Joe]

Options boy, your question is very simplistic and a little Google searching can help you find the answer. Check investopedia they should be able to explain it well there.

 

[spindr0]

If a stock is selling at $40/share, why would anyone want to buy a call option with a strike price of $15? How can one profit from this? Shouldn't they buy a call with strike price of 40 or 45?

Deep ITM calls move $ for $ with the underlying (read about the "delta" of an option). If the stock goes up a $ then the call goes up a $ (and conversely). OTM options provide leverage. With large move in the underlying, they can make a earn a greater ROI... and w/o it, they can lose 100% of their value.

Also if a stock is selling at $120/share and someone buys a call option with $135 strike price, will they profit if the stock goes to $125? or will they need to wait if the stock rises to more than 135 a share?

The call owner profits if the value of his call rises at any time prior to expiration. On an expiration basis, the stock must rise to the strike price plus the premium paid in order to break even.

These are pretty basic questions so I'd suggest that you read some option books or hit the option sites on the web. 21st Century Investor used to offer a free options course at their site. Look at it and others.