Currently Studying Options: Call Option Question

[luketurner13]

Hey,

I am currently studying options and would really appreciate from advice.

I think I am overthinking and I want to make sure that I have this right before I carry on.

Here is an example:

Current underlying stock price $58.00

I then buy a call with a strike price at $40.00 with an expiration of two weeks.



Does this mean that in these two weeks the underlying stock price will have to rise so much, say to $76.00 just so that I will then break even?

Would really appreciate an answer and thank you in advance

Thanks

Luke

 

[cynic]

More information is required.

What price was paid for the call ?

 

[luketurner13]

More information is required.

What price was paid for the call ?

So the premium price is $11.50

 

[Gunnerguy]

So the premium price is $11.50

So underlying is 58. Strike price is 40. PM is 11.50.
If this is the case why not by the call, execute it immediately (if American) then sell at 58 ? Profit of (58 - 40 - 11.50) = +6.5
Are you sure your numbers are right ?


GG

 

[luketurner13]

I am using the data from the top option. It seems to straight forward to buy that call at 45 and then be able to sell for a profit.

 

[cynic]

At expiry, the stock price would need to be $51.50 + costs associated with exercise, in order to break even.

Normally one wouldn't expect to see an American style option trading at less than its intrinsic value.

 

[cynic]

View attachment 124980

I am using the data from the top option. It seems to straight forward to buy that call at 45 and then be able to sell for a profit.

To buy the call at market, you would be paying the ask, i.e. $13.45 for the 45 call.

 

[luketurner13]

At expiry, the stock price would need to be $51.50 + costs associated with exercise, in order to break even.

Normally one wouldn't expect to see an American style option trading at less than its intrinsic value.

hopefully the pic I have just attached will make more sense of it

 

[cynic]

hopefully the pic I have just attached will make more sense of it

It certainly did. See post#7 for my response.

 

[luketurner13]

So the premium price is going to be $1345.

Then will my profit or loss move up or down in relation to the underlying stock price or the options price movement itself.

In my head if I am buying at $45 strike price but the underlying is $58 then its got a long way to go until I break even at least. So the option has to move a long way to make it worthwhile.

 

[cutz]

So the premium price is $11.50

Not sure if this has been answered, don't price option price based on last trade, that 45 is mostly intrinsic value , at the prices quoted all else remaining the same you will be paying between 13.15-13.45 , this is a pure delta play and you will make profits if the underlying keeps pushing up.

Question for you, what's the delta on that option ? My guesstimate would put it around 0.8 - 0.9 ...

 

[luketurner13]

Not sure if this has been answered, don't price option price based on last trade, that 45 is mostly intrinsic value , at the prices quoted all else remaining the same you will be paying between 13.15-13.45 , this is a pure delta play and you will make profits if the underlying keeps pushing up.

But you would not be making profits straight away? Would you have to work your way up though the red and the break even

 

[cutz]

But you would not be making profits straight away? Would you have to work your way up though the red and the break even

Not quite sure I get you ,

Do you have a delta for the option in question ?

 

[striek]

If you paid the ask price ($13.45) the stock would have to rise to $58.45 for the option to become profitable at expiry (ITM).

$45 strike price + $13.45 you paid.


The option has $13.08 of intrinsic value (what it's worth if the stock doesn't move by expiry). It's got $0.37 of extrinsic time value. So you need it to increase by more than that by expiry.


No one is going to sell you an option that is immediately profitable without risk. People don't give away money for free.