I've traded stocks for years, but really have no clue about trading options. I was just watching this video on YouTube (it's an older video), which shows a guy trading SPY options. I took this snapshot and I'm just trying to figure it out so that I can have just a basic rudimentary understanding of trading options. Ok, my question here... I'm looking at the call options on the left, and the one that is highlighted is showing that the last trade price is $0.87 for one contract. Let's assume this was my trade. Let's say I just bought one call option for $0.87. This allows me the right to buy 100 shares at $266.00 through the end of November 21st. Correct? So let's just say SPY goes up to $268 today, the same day I buy the option. So at 4pm let's say I decide to exercise the option. And so I go ahead and buy 100 shares at $266.00. Then I turn around and sell it at 4pm for $268.00. I just made a $200 profit. But my total risk was only $0.87? That can't be right. I must not be understanding this correctly. What am I not understanding here?
$87.00. The price of the option is based on a multiplier of 100 shares. What you paid for the option in your example was $87.00. BMK
OP, you may find it helpful to play with the calculator on this site: https://www.optionsprofitcalculator.com/calculator/long-call.html
95% of option traders are not interested in trading the stock. So in your example instead of exercising the call option to buy the stock you would sell the call at $2.00. $2.00 x 100 = $200 $200 - $87 = $113 profit About the same profit if you exercised the calls, then sold the stock.
@Math_Wiz You may be wondering why option prices are displayed this way. Part of it just tradition, i.e., this is how it has always been done. Of course, things can and do change. When I started trading, stock and option prices were expressed in fractions. Stocks traded in eighths of a dollar, and options traded in sixteenths. But option prices have always been expressed per share, and that's not likely to change. Because the real reason is that in some cases, the multiplier is not 100. There are some option contracts that are tied to less than 100 shares of stock. This does not happen often. And when it does, you should get a very prominent warning message on the order screen, before you click to submit the order. Happens as a consequence of stock splits and spinoffs. BMK
Think about it. you buy a call, total risk = debit paid +1 NOV SPY $266 CALL @ 0.87c total risk = $87 If you want to call the stock and choose the right to exercise, you buy 100 shares at the strike you bought the call ($266). Your total risk was initially $87 greenbacks, now it’s $26,600, just to sell it for $200. might as well just trade the stock initially instead of going through the hassle of optionality?