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# Can someone take a look at this?

Discussion in 'Options' started by chiefraven, Feb 18, 2007.

1. ### chiefraven

I'm reading my first book on Options. It's called "Getting Started in Options. by Michael Thomsett"

However, i'm a little confused by a paragraph he wrote and was wondering if it was simply a mistake or not. hopefully someone can clarify this for me.

in this example:
"you buy an 80 call for 2 (\$200), which provides you with the right to buy 100 shares of stock for \$80 per share. If the stock's value rises above \$80, your call will rise in value dollar-for-dollar along with the stock. So if the stock goes up \$4 per share to \$84, the option will also rise four points, or \$400 in value. You would earn a profit of \$200 if you were to sell the call at that point (four points of value minus the purchase price of 2). That would be the same amunt of profit you would realize by purchasing 100 shares of stock at \$8,000 and selling those shares for \$8,200."

my question is:
if the stock went from \$80 to \$84... and it says that the options value will rise along dollar for dollar with the stock price... an increase of \$4 in stocks, wouldn't that be an increase in the option's premium... from 2 to 6? since 2+4 = 6 (\$600)

so you end up making 400 bucks since you subtract the initial 200 dollars you spent on purchasing the call?

and the end of that paragraph also seemed kinda strange...because if the stock went up \$4 from 80 to 84 bucks... and you have 100 shares of this stock, you would make 400 dollars.....but in this case it says this example is the equivalent of making \$200 only?

so we make less money in options if the stock moves up 4 points than if we just buy the equities? 'cuz if the paragraph is correct, we only made 200 bucks from this options trade, but if we were in equities, we would've made 400 dollars?

2. ### chiefraven

so basically this premium which we have to pay for options is just one disadvantage to this whole instrument? since we stock we can just put up a certain amount of shares and if we get out with a profit, we take all that profit for ourselves, but in options, no matter if you lose or win money from the trade, the premium is already paid.. which is why we made less than we would have in the stock market in the previous example?

i guess eventhough we automatically losses the money we pay for the premium to play the options game, it's still less risk than the amount we would have loss in a worst case scenario in equitites.

3. ### Wayne Gibbous

If you buy the 80 call for \$2, when the stock is at \$80, the call value is totally "time" value. If the stock stays at \$80 you lose \$200.

When the stock moves to \$84, the call is now \$4 "in the money". That is, it's worth \$400. That is if it is held to expiration (all the value is "intrinsic"). If it is sold early, it will be worth more than \$400 because it will still have some time value, which will be based on its "implied volatility".

Look at a few option quotes from a big stock like AAPL. Notice the Strike Price, the Expiration Date, see how the different strikes and months compare to the current price of AAPL stock.

Hope this isn't too confusing.

4. ### Wayne Gibbous

The only real "disadvantage", over time, to trading options (long or short) is the rather wide (sometimes OBSCENE! b/a spread)

Options on liquid securities, and option strategies, have no inherent advantage or disadvantage. I personally don't believe the old saw "Pros Sell options and Amateurs Buy options". "Pros" like Ansbacher have done amazingly well selling options, while others like V. Niederhoffer have gotten crushed.

I have lost my ass selling them and made many \$\$\$ buying them. It's all about the TRADE, your experience, and what you are comfortable doing. (keep an eye on that underlying!)

Well that's my story and I'm sticking to it!

5. ### nazzdack

Assuming you pay \$2 for the 80-call-option when the stock is at \$80/share-----you earn 100% on your money when the call-option moves from \$2 to \$4. You earn 5% with the stock when it moves from \$80 to \$84. The option provides more leverage and limited downside risk in exchange for the premium.

6. ### hopback

You're right. That explanation isn't very complete.

As the stock rallies from 80 to 84 the 80 call will now have \$4 intrinsic value but he doesn't provide enough details.

If the stock was at 80 when you paid \$2 for the 80 call then you paid all time/vol premium.

If we assume it is now 3:55 on expiration Friday and the stock is 84 then your call will probably be 3.90 bid at 4.10.

So... If your were able to sell it at 4 that he would be correct, you would realize a \$2 net profit. It's a bit of a stretch to assume that is what he intended to say.

7. ### chiefraven

thanks for all the clarifications guys. can anyone show me a few good options website? either educational or web sites you guys use when doing research, looking up options quotes.. etc

8. ### OptionPundit

You may want to visit OP's blog at http://www.OptionPundit.net/

This covers a wide range of topics on options including basic, intermediate and advance option trading strategies. In fact there are several trade examples that you may find useful to study. Time to time there are explaination about strategies and good books recommendations, that you may find worth reading.