If I buy an option at $50 strike and it goes to $52 how do I cash in? Do I exercise, which gives me 100 shares at $50 and then sell 100 shares? If it is at 49$ I just let it expire because If I exercise I would lose even more than the premium?
It depends. if its american or euro and the benefit depends what you spent on the contract. american: exercise contract any time. euro: exercise contract at expiration date only. your scenario, if the underlying is at $52 and you are at expiration with 1x 50 call contract. a) the contract is now intrinsically worth 2.00 per share ($200) and you can sell it for around this much. b) you can exercise the contract, where you buy 100 shares @ $50. total cost $5000 + what you paid for contract. you can now sell these shares at the market price of $52. most people would just do A) since the return on capital is usually higher.
@49, your call option expires worthless or you can sell it back at w.e the market rate for that contract is at expiration.
http://www.amazon.com/Options-Investing-Business-Books/b?ie=UTF8&node=2672 I think there are 100 PAGES of books. You could try reading just one... and then start trading so we can take all your money.
Alot of people fear option or at least not understand it completely. The question I have been asked the most is "Why would anyone want to buy your call option if the stock is going down and you are losing money?"... They confuse that if the strike price is $50, you HAVE to excercise it at $50 because you simply just cannot get rid of the contract by selling it (does not matter if it is at loss). They think more in lines of a Binary Option, where the outcome is Hit or a Miss!
Ahh.. I think I got you. I have another question for fx options like 6E: the market is at 1.2535, I buy a call at 1.2550 for 0.0114. I buy put at 1.2500 for 0.0106. So my premium is 220 ticks?($12.5 x 220 =2750$?) So the breakeven point for the put is 1.2500 - 220 = 1.2280? And for the call 1.2550 + 220 = 1.2770?
Now that you know the basics of options, here is an example of how they work. We'll use a fictional firm called Cory's Tequila Company. Let's say that on May 1, the stock price of Cory's Tequila Co. is $67 and the premium (cost) is $3.15 for a July 70 Call, which indicates that the expiration is the third Friday of July and the strike price is $70. The total price of the contract is $3.15 x 100 = $315. In reality, you'd also have to take commissions into account, but we'll ignore them for this example. Remember, a stock option contract is the option to buy 100 shares; that's why you must multiply the contract by 100 to get the total price. The strike price of $70 means that the stock price must rise above $70 before the call option is worth anything; furthermore, because the contract is $3.15 per share, the break-even price would be $73.15. When the stock price is $67, it's less than the $70 strike price, so the option is worthless. But don't forget that you've paid $315 for the option, so you are currently down by this amount. Three weeks later the stock price is $78. The options contract has increased along with the stock price and is now worth $8.25 x 100 = $825. Subtract what you paid for the contract, and your profit is ($8.25 - $3.15) x 100 = $510. You almost doubled our money in just three weeks! You could sell your options, which is called "closing your position," and take your profits - unless, of course, you think the stock price will continue to rise. For the sake of this example, let's say we let it ride. By the expiration date, the price drops to $62. Because this is less than our $70 strike price and there is no time left, the option contract is worthless. We are now down to the original investment of $315.