I need to go back through the Basics of Options , cause I for the life of me can not remember the following ..... When does an OTM Option begin to make money ? Is it once the Stock Exceeds the Strike price of the OTM option OR will that OTM option begin making Money AS SOON AS the stock starts moving in the direction of your OTM Options ( Calls for Long in this Example ) ? Say that XYZ stock is trading at $50 and we buy the $60 call for .50 cents . with 3 months till Expiration. If the Stock starts going up , and reaches say $53 in 1 weeks time ( so we still have plenty of time left till Expiration ) ..... How much would our $60 Call now be worth ( roughly ) ? Do we look at the Delta when we first buy the $60 Call, to tell us what are Option will be worth " Per " $1 that XYZ stocks moves up $1 ( so long as there's enough time left to go till Expiration, so that Time Decay is not a factor ) ? Thanks man for your help . Don't know why I don't know the Answer to this I'm tryig to make sure I understand how these Way OTM work ( Move up in Price ) in comparison to the amount the stock goes up and we also have plenty of time left till Expiration. I " Think " that when the stock moves up say $3 , that are $60 Call that had say a Delta of .10 when we first bought it , might now be a .30 Delta , and so we are Increasing the Value of our Option , Even WITHOUT the Stock reaching and Exceeding the $60 strike ? Thanks for the help, I really appreciate it
An OTM option starts to make money when its price increases above the value you paid for it or said another way when you can sell it for more than you paid for it. Stock does not have to cross the strike price. Easy to read up on delta and gamma which indicate theoretically how a call price will move for a move in the underlying, holding all other things constant. Problem is that when the stock in your example moves to $53 it also matters how much time has passed and whether there was an external factor pushing IV up or down. Bot for now to understand the theory of it, find a stock option price simulator online for free and enter in the hypothetical stock info you suggested and then move the time to expiration, underlying stock price and see how the option reacts.
Not that easy mate. It totally depends on what implied vol is involved... delta... gamma... vega... theta. Stock can go up and you can still lose because time decay might be bigger than what the delta x underlying move makes the value of your call go up. And maybe the implied vol will drop so you will lose as well on vega. Let's say the delta's in your example are correct, which they are not, at 50 it might have 10, but than at 53 it's more likely to have a delta of 12, but let's assume you're right... Your delta changes because of your gamma, which according to you is (0.30-0.10)/3 = 0.066. Your average delta is (0.3+0.1)/2 = 0.2 over $3, so your gain in the 60-call is 0.20 x 3 = 60 cents.
Nothing with Options Greeks is black or white. Your chances of making money with a gamble on OTM is slim. Why do you want to lose money? Gamble away on Options, Futures and Forex if you wish but if you want to retire comfortably stop gambling on these instruments.
I am looking at OTM Options as a Possibility on Buying ourtight Long Puts on the Big Banks " If " the Economy crashes ( Similiar/worse to 2008 is projected ), and want to have an Idea as to what type of Profit I can make on these OTM ( say .10 - .15 Delta OTM Option Strikes, at the time I purchase the Options ), and then if my Projection is correct, .... I want to keep Rolling the Puts , further and further out " In Theory "
Use an options calculator and just do 2 calculations and analyse the differences... There are also many web-based online calculators out there, for example this one: http://optioncreator.com/options-calculator