I’ve read a few option books.
THANKS... This is probably the most comprehensive "greeks" article/book I’ve read.

Wonderful blog. …..
A wonder wealth of knowledge there. Thanks so much for your kindness in publishing it!

Thank you very much for the most concise and simplest option intro. Highly recommended.

So far, yours is the best blog/site on basic options notes in the web that I have chanced upon.

Saturday, April 14, 2007

What is Call Option? (Part 2)

Click here to go back to “What is Call Option? (Part 1)”

Company ABC is currently trading at $23 per share. You believe the stock will be going up within a short time period. Hence you buy one contract of Call option that gives you the right, but not the obligation, to buy 100 shares of the company anytime in the next 90 days for $25 per share. The option’s price is $0.5, so you will buy one option contract for $50 (multiplied by 100 shares per contract).

If your prediction is right and the stock rises to $ 28 per share before the option expires, there are 2 alternatives you can do:
1) You could exercise your option and buy 100 shares at $25 per share and sell them for an immediate profit of $2.5 per share ($28 - $25 = $3 - $0.5 for the option premium = $2.5 per share). However, as a practical matter, options traders rarely choose this alternative.

2) You could simply sell the option contract for a profit without actually buying the shares of stock. When the stock price increases to $28, the option price would at least be worth of $3.00 (intrinsic value only). Hence, you will also gain $2.5 per share ($3 - $0.5 for the option premium = $2.5 per share). This is what options traders will normally do.

On the other hand, if your prediction is wrong and the stock moves nowhere or drops from the original $23 to $21 per share, you would simply let the option expire worthless and suffer only a $50 loss (the option price), because in this case, most likely the option would have no value.


Anonymous said...

When you say, "You could simply sell the option contract for a profit without actually buying the shares of stock.", do you mean you could sell to the writer or in the markets?


You could simply sell the option contract in the market.
When doing options trading (buy/sell), we normally don't even know who the writer/buyer of the option is.
Everything is done in the market via your broker.

Hope that clarifies. :)


Anonymous said...

With that said, is it possible for there not to be a buyer?


Hi Anon,
When you want to buy/sell via a broker, for the broker to be able to execute your trade order, there must be a seller/buyer at the other side of the transaction.
Otherwise, your order cannot be executed.