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Understanding Stock Options.. the Long Call

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Prospect
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Joined: Sep, 2007
Posts: 88
Posted: #1
Everywhere I look online, I see a lot of big explanations and definitions but no real time hypotheticals maybe the good folks at covers can help me out.  Please visit etrade and look up stock BYD.  Click on the options chain tab.  Look at the options expirations for December. 















  Puts
Volume Net Change Last Bid Ask Strike
Price		 Bid Ask Last Net Change Volume Open
Interest		 Symbol  













Trade
1 -0.40 1.55 1.55 1.70 12.5 2.95 3.20 2.80 0.00 0 997 BYDXV Trade
1 0.00 0.90 0.75 0.95 15.0 4.70 5.00 4.00 0.00 0 906 BYDXC Trade
12 -0.10 0.50 0.40 0.55 17.5 6.80 7.20 6.60 0.00 0 559 BYDXW Trade

I'm looking at The strike price of 12.5.  What is the minimum I could invest since a single contract is for 100 shares of the stock.  What is my profit if the stock climbs to 20 just as an example.

Thanks guys
 
Covers Rehab
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Joined: Nov, 2006
Posts: 1817
Posted: #2
you would be screwing yourself to buy at strike price $12.50 as byd currently trades for $10.90. i believe the min for a contract stock option is 100 shares....

100 shares at 12.5 (held for some set duration of time i think lets say a year) $1,250....after a year you can exercise your option to buy 100 shares at $1250 or if it's trading for $25 you can sell your 100 shares for $2500.

but i think its only a good buy if the strike price is below current market price.

there is an investment forum they might be able to help you more. i stick to midgets and elephants eating shit out of eachothers asses (see CrusCrnshw thread, it's a winner)


 
Veteran
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Joined: Feb, 2006
Posts: 3392
Posted: #3
go to the investment forums.  but i wouldn't suggest buying those options.  there isn't enough liquidity involved (see the volume of 1 call).  if you buy contracts, and then you want to sell them, there might not be any market to buy them from you.  open interest is low.  bid/ask spread is wide
 
Veteran
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Joined: Sep, 2003
Posts: 3664
Posted: #4
Quote Originally Posted by FadeMeAllDay:

you would be screwing yourself to buy at strike price $12.50 as byd currently trades for $10.90. i believe the min for a contract stock option is 100 shares....

100 shares at 12.5 (held for some set duration of time i think lets say a year) $1,250....after a year you can exercise your option to buy 100 shares at $1250 or if it's trading for $25 you can sell your 100 shares for $2500.

but i think its only a good buy if the strike price is below current market price.

there is an investment forum they might be able to help you more. i stick to midgets and elephants eating shit out of eachothers asses (see CrusCrnshw thread, it's a winner)


You are right in that one contract gives you the right to buy 100 shares at 12.50 a share, but you cannot sell 100 shares at 25.00 if that is the price. You would have to exercise the option first, then sell the shares. If you owned the 12.50 calls and the stock went to 25.00, you would sell the option and close out the contract but the premium for the option would be higher. Example, you pay 1.55 for one contract and the stock goes to 25, you may be able to sell the contract for 13.00. Again, it all is going to depend on the expiration month and the volitility of the stock. Having said that, have you ever traded options?

 
Captain
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Joined: Jan, 2003
Posts: 5518
Posted: #5
There's an old saying that 90% of people lose there shirts on options. I think most people forget that this includes professional traders as well. Personally I've only got involved with options whenever I had good solid insider info. Just be aware that options sometime look a lot more attractive than they really are.
 
Most of what was said above is true. Keep in mind that the farther out the expiration date of the options also plays a huge part as well as the volatility of the stock in the overall price of the options. Also keep in mind that the price of the option is set by people who do this for a living so you'll often see huge swing in bid and ask prices of these options - traders might want to cover a position or they might be fishing etc..
 
Yeah, put this in the investing forum also. Wallstreetcappers is usually good with this stuff and if I remember correctly there was someone who been doing really well lately trading options.   
 
 
 
Prospect
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Joined: Sep, 2007
Posts: 88
Posted: #6
I was just being hypothetical.  I'm not buying any options right now.  I never have.  I remember in college something like for every 1.70 points the stock goes up after the strike of 12.5 you make a return on your investment of the initial size.

Anything like that sound familiar?

Thanks guys
 
Veteran
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Joined: Nov, 2006
Posts: 1752
Posted: #7
If you bought one contract at the ask price it would be $320 + commision (lets say $10 for the trade and $1 for each option).

So $331 would be the total outlay up front if you bought one option. 

If the stock reaches $20 the week before the options expire, the approximate value of the option would be at least $7.50 ($750 value), the price difference between the stock value and the option strike price.  If it hits $20 a few weeks before expiration, I would guess the value of the option would be closer to $8-$10 ($800-$1000 value) since you would still have a time premium for a December expiration.  Although there are many other variables that will affect the exact price, that is a rough overview.

You can sell the option whenever you want and take the gains or losses or you can hold the options through expiration and purchase the actual stock shares at $12.50 each.
 
Veteran
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Posts: 1752
Posted: #8
Quote Originally Posted by ThaHanDoGG:

I was just being hypothetical.  I'm not buying any options right now.  I never have.  I remember in college something like for every 1.70 points the stock goes up after the strike of 12.5 you make a return on your investment of the initial size.

Anything like that sound familiar?

Thanks guys


It depends on the price that you paid for the options, the volatility in the stock and the time premium left before the option expires.

As an example, I bought GS $105 Oct puts a few weeks ago for $.80 each.  GS stock went up $20 and my puts dropped to $.25, GS dropped $50 and the puts went to $7.00+ each.  I sold the puts long before they hit $7.00 but that gives you an idea of how crazy it can get.
 
Prospect
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Joined: Sep, 2007
Posts: 88
Posted: #9
I need more hypothetical situations please.  If the stock price is $20 how much are my options worth in a particular scenario?

Thanks Much
 
 
Veteran
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Joined: Nov, 2006
Posts: 1752
Posted: #10
I guess you could look at Optionmonster.com and look at the sales prices over the last few days on the options you are interested in and then cross check it will a daily chart of the same stock to get a rough idea.

But with the volatility in the market now, those same price fluctuations will not be a true indicator for the rest of the life of the option.
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