I was reading option chains and I saw the following: Stock price is at 20$. I can buy a deep in the money put option for something like 40.12 $. Strike price is 60 $. So in this situation, I buy 1 put option for 4012 $. and I can exercise my option immediately. So I buy the stock at 20 $ and I can sell it at 60$ that X3. 6000 $ X 3 = 18000$. 18000$ - 4012$ = 13988 $. 13988$ - 6000$ = 7988$ profit. Is this possible? Because you can triple the money, your option premium will never be too expensive. What am I missing here?
I highly recommend you follow these steps, 1) Calculate the gain on the closed transaction with one trading unit. (We trade in .01 increments for stock options.) 2) Subtract the cost to get net profit/loss 3) Finally, unit value for total profit in PnL dollars. So we have, Sold 60.00 - bought 20.00 = $40.00 gain from a closed position $40.00 gain - $40.12 option cost = -.12c (a loss!!) -.12c x $10 ( value of a cent in round lot terms) = - $120 Doing it methodically this way will transfer to making calculations with products that may be expressed in cents, pips, tics, and points. Expressing calculations in a single trading unit is your first step.