Silly question

Discussion in 'Options' started by 101option, Feb 16, 2011.

  1. 101option


    Hi all,
    let say I buy a call of BP for March 19,
    Strike 48 at .90/share. The price now is 47.30.
    OK, between now and Mar 19, it must go at least above 49/share before I can profit (excluding fee).
    My questions are, please explain:
    1. What happens if I let the contract expires and the price is 50.90?
    2. Who would buy from me at higher price. Everyone loves to buy low, right?
    Thanks for your time.
  2. I am a pretty big noob when it comes to options but I really want to learn about them. Here's my attempt at answering thie silly question. Please correct me if I am wrong.

    1. At expiry since the stock price is now 50.90 the call premium will be at 50.90-48 = 2.9. so this will be your gross profit. Since you orignally paid 0.9 for the call your net profit is 2. So your account will be credited with this profit. (all this assuming no commisisons/fee's)

    2. Well you bought at 0.9 becasue you thought it was attractive, if it's liquid enough somebody will think it's attractive at X premium so it will sell. If theres little volume then you might be screwed.
  3. MTE


    First of all, the stock only has to be above 48.90 at expiration for you to profit. Prior to expiration you can make money earlier, depending on where the stock is, how much time is left and what happens to volatility.

    1. If you hold the contract into expiration with the stock at 50.90 then your call would be automatically exercised and you would end up with a long stock position, acquired at the strike price.
    2. You are assuming that everyone thinks the same thing and is in the same position as you are, which is incorrect. There are thousands of traders, who have different opinions so the fact that you bought the call @ .90 doesn't mean anything to anyone else out there.
  4. Just to elaborate on what MTE stated. A buyer can purchase the option from you at a slight discount to intrinsic value:

    Shares: 50.90
    Strike: 48.00
    Intrinsic value: 2.90
    Option market: 2.75 x 3.00

    Buyer takes your call at 2.75 and immediately shorts 100 shares at 50.90. He makes 0.15 less commission, as the long call will exercise and be netted against the short shares from 50.90. Essentially a market-maker function.

    Buyer could simply want to own the shares at a slight discount. Buys the call at 2.75 and is exercised. Buyer is happy to own shares at 50.75 + commission.
  5. 101option


    Thanks MTE and atticus.
    I am still puzzled.

    1. what is Option market: 2.75 x 3.00 (I understand to sell the option below the actual, 2.75 instead of 2.90, but what the 3 is)

    2. so if I let it expires, I will have to shell out 4800 (not 5090) to own 100 shares, right? I always think the system automatically sell the option for me at the expiration date (i have no obligation to buy the 100 shares???).
    Why I think it that way, because if the price is 48 or less by the expiration date, I would have lost 90 + fee, the system just sell to close for me.

    I read a long and a short positions several times already but still am lost. :confused:
    Please explain more.

    Thanks much.
  6. MTE


    2.75 is bid, 3 is ask.

    Yes, if the option expires ITM, hence automatically exercised you would have to shell out 4800. The system does NOT automatically sells anything.

    If the option expires OTM then it just expires worthless. Again the system does NOT sell anything.
  7. tomk96


    if the market is wide on your in the money call and you can't afford to own the stock, your broker may exercise the call and sell the stock out for you. stock bid/ask is tighter than the call's bid/ask.

    if for some reason, you don't want the call to get exercised, you need to contact your broker to fill out a contrary to exercise (do not exercise) form. however, you don't get any profits.
  8. 101option


    I understand now how risky the stock option is.
    Timing and following it very closely is what I need when doing stock option.
    hmm!!! not simple and straight forward as I think.

    Thanks again.