I'm a little confused about something and was wondering if someone on here could clear this up for me. When it comes to buying long calls I understand that you can buy a call and either realize that option or let it expire. What I'm wondering is if you can go and sell that option back to someone else. For example I buy 1 contract of XYZ for a premium of $2 and a strike price of $40. The price of the stock goes up to $50 and the premium also increases to $3 so I decide to "sell". Instead of purchasing the 100 shares then selling them and making a profit of $800 can I just sell the option at $3 and make a profit of $100(300-200)?
Yep, you can buy 'em and sell 'em, or sell 'em and buy 'em. More correct maybe to say you "buy to open" (long option) and "sell to close." Or "sell to open" (short option) and "buy to close."
Ok thank you. So if you have the capital to buy the shares that would obviously be the more profitable way to go, right? When would you want to make your profit based on the buying to open and selling to close method?
Given a certain move for a fairly low volatility stock, say 3% over a week or two, you make 3%, or 6% on 50% margin, if you buy the shares. But a long, near the money, next month call could easily increase in value 50% or more. And at far less money at risk. There are plenty of gotchas, of course...
Here is a real example (cherry picked!) from my trading log. I buy long calls, at very low account leverage, on indexes that have dropped a bit: On 1/30/15 I bought some SPY Feb 201 calls at 3.2 ($320). I sold them after a nice move on 2/6/15 for 6.15 ($615). That's a 92% profit, and if SPY had dropped instead I only had $320/contract at risk. There is much more to the story of option trading of course, time decay, volatility, b/a spreads, etc.
Ahh ok gotcha. But if you would have realized the option on 2/6/15 you would have made an even bigger return, correct?
If you mean that if I had exercised the calls, I would still be buying and selling the stock which would require much more capital. That would greatly lower return on risk. For me, I find the best return to be just trading the options. I no longer trade the stocks themselves.
For newbies, just in case anybody didn't get it, if I bought 100 shares of SPY for $201/shr on 1/30/15 it would have cost $10,050 on margin. If I then sold it for $206/shr on 2/6/15, I made $5/shr or $500. This gives a return on investment of approx 5%. Not bad for 6 days hard work. But the long option cost $320 and returned $295, or approx 92%. And total risk was tiny. That's why I trade the ops. Lots of caveats of course. And no matter how good your trading method is, you will have losses. That could have easily been -92%. I start the year with small trades, then as I build profits I rapidly increase size so I eventually only trade with profits. This is possible with options because of the low investment cost. Haven't traded this method in a bear market, though. I'm pretty sure it would be a tough slog, but as long as I stuck to proper trade sizing, my losses would not be too bad in any case. Good trading to all.
Max, I looked up some of your posts and you don't seem as green as you sound right now. Seems like you have a lot on your plate, but you could be a genius for all I know. Read up and bring questions to the forum. 1) http://www.investopedia.com/university/options/ 2) If that seems too simple then move on the "Options Basics" on this website. http://www.volcube.com/resources/options-articles/ 3) Next section, "More Advanced options ideas" 4) Finally, "Option Trading and option strategies" After that, you can teach me how to trade options because I tend to forget.
Thanks for sharing this information, As i too was unaware about the sell and buy process and reading this i got much more knowledge.