if i buy a call , strike $10 when price of stock 5, say. so now the stock trades at $20, can i just exercise the option, making my profit(100X10-(premium+commission)) ? couldn't i just buy an in the money option and immediately exercise it? or does the cost of the premium of the deeply in the money option outweigh any profits made by exercising it immediately? As you can see i'm a complete noob on options, what i mainly want to do with them is hedge, i.e. go long a stock and place a put under price. Don't want to start straight away as i don't want to trade these sometimes hard to understand securities, so any good books for the beginner?
You can find the answers to your questions by looking at an option chain and thinking a little bit. The first option, $10 strike, when price is 5, will usually be a couple of pennies to buy, let's say $.05. When the stock goes up to $20, the same $10 strike option will be worth about $10.01. You could exercise, buy many options traders would just sell the option, making their gain without dealing with the delivery of large quantities of stock- which you'd have to turn around and sell. For the answer to your ssecond question about buying an ITM option, look at that second option. Stock at 20, the 10 option costs you 10. You don't make money unless the stock moves up- any arbitraging opportunities are being done on the sell side- making option prices efficient. Caution: the more you learn about options, the more you become surprised at how little you knew when you started trading them. Options can lose you a lot of money- be careful.
yeh thanks, just trying to learn as much as possible;i've been told that options can be awesome for hedging/speculating etc, but noobs like me go in and start selling and buying or whatever lol.
Don't trade before you are ready. Read books, blogs, take free webinars, have patience. Mark http://blog.mdwoptions.com/options_for_rookies/