So I am new to the world of options trading, after several weeks/months of reading every book I could find. I understand the basics, so I decided to jump right in and trade one. So I bought the Feb 60 call for CELG, the day before earnings came out. I paid a .50 premium. This is the question: Everything I read about options said you have made a profit when: "The price of the stock is the strike price you bought plus the price of the premium you paid", making me believe CELG needed to go from around $55 to above $60.50 for me to make any money. So CELG reports good earnings and outlook, but only goes up a little. So my option loses lots of value and I can understand this. So this morning I see that CELG is up around 5% or so to $59, so I was thinking maybe I would be less in the whole. But I checked my account and I was up a profit of about 220%. So whats all this talk about needing the stock to be at the Strike + Premium to get paid? Is that just talking about exercising your options?
When you buy a thing for money, and you sell the thing for more money, you have made a profit. When you buy a thing for money, and it is worth more money, you have a paper profit. There isn't any more to it than that.
So you're saying, when I buy something for less than I sell it for, thats a profit? Wow, I wish more people knew that!
You seem to have the right instinct, but if you accept what you learned in those books about how to calculate breakevens, you have just been "infected by a trading disease". Check this thread out: http://www.elitetrader.com/vb/showthread.php?s=&threadid=116489
There is more to it than that! You may need to scale up your thinking about this topic (if you actually traded/trade options from the buy-premium side).
The breakeven is not $60.50. Post the delta (when you opened the trade), and I will tell you what the breakeven is.
I sincerely doubt any book on options said what you quoted above. It is quite possible that in your inexperience you may have misread what the books have said because that statement is very wrong. But this is part of the learning process. Buying to open and selling to close options for a profit is not different than buying a stock and selling it for a profit. You make an unrealized profit when the price to close the call (whether you look only at the bid or the midpoint) is higher than the price you paid to enter the position. At what stock price and when that occurs prior to expiration depends on time to expiration, volatility, delta of the option, etc.. Your CELG profits aside, take as much time as you need to really learn the basics before putting real money into a positions. And if you must venture keep the position sizes really small. Find an option analyzer tool where you can visually see the theoretical changes in the price of the option with changes in volatility, time and choosing different strike prices. Take your time to learn it, the market is not going anywhere.
I'm pretty sure thats what it said. I will find the books and i will find the quote and post it here.