Lux Investing
A Question on Options investing I need some detail?? zman492, if you read this answer it?last answer was good?
zman i just need a little more detail Let’s say the strike price is at $2.50, the stock is selling for $11/share, the bid price for the option is at $8.35, and the asking price for the option is at $8.50. Then $2.50 is the amount that I can buy the stock for at anytime that the stock is above the current stock price of 11.00?? When I say, “can I buy this stock at $2.50 at anytime while the stock is above $11,” I’m asking if I need to spend other money that I’ve got in my account to buy the shares, or do the stocks get bought when I exercised the option, by the money I’ve already paid for the option, which would be $8.50 if I paid asking price for it., and only bough 1. If this is the case and I can pay $2.50 for 100 shares of a stock, or $250, that is paid for by the option money, $850, what happens to the other $600, which is the amount not used to buy the shares, because the shares only cost $250. does the 600 go into my account or do I only get it when I exercise the option. If this were a true scenario would it be a bad idea to exercise the option if the option went up any?? I’d still be getting all those shares at $2.50, Right? This may be a stupid question, but I was wondering how I would exercise an option on a scottrade account. I don’t have an options account through them yet, but I do have a regular account and an ira. Would there be something that I push to tell it to exercise the option or would I have to just sell them.
Public Comments
- The bid and ask would both be above 8.50. To be less than that would invite immediate exercise. such arbitrage situations do not exist for more than a moment. That said if you paid a realistic near month price of 8.60 for the option and exercised it you would still pay the 2.50 strike price. Being so deep in the money the option price would act nearly the same as the stock price. Not much reduction in down side risk, near the same potential gain. To profit with the option at 8.60 the stock would have to be above 11.10. The price for the option at 8.60 would include 8.50 intrinsic and .10 extrinsic. Your 600 is a non functional number. The only relevance is as part of the intrinsic value. Exercising the option or selling it is your choice depending on if you want the stock. If you don't have the option on Scottrade then you can't exercise an option you have on another brokerage there.
- <<<Let’s say the strike price is at $2.50, the stock is selling for $11/share, the bid price for the option is at $8.35, and the asking price for the option is at $8.50. Then $2.50 is the amount that I can buy the stock for at anytime that the stock is above the current stock price of 11.00??>>> You can buy the stock for $2.50 per share at anytime prior to expiration, even if the stock price is less than $11.00. The only thing that is significant about $11.00 is that it is your "break even price" at expiration or, in other words, the total amount you would pay per share if you exercised the option. <<<When I say, “can I buy this stock at $2.50 at anytime while the stock is above $11,” I’m asking if I need to spend other money that I’ve got in my account to buy the shares, or do the stocks get bought when I exercised the option, by the money I’ve already paid for the option, which would be $8.50 if I paid asking price for it., and only bough 1.>>> You would have to pay an additional $2.50 to buy the stock if you exercised the option. (You do not need to exercise an option to close your position. You also can simply sell the option without ever exercising it.) That is in addition to the $8.50 you already paid, making your total cost per share $11.00. <<<If this is the case and I can pay $2.50 for 100 shares of a stock, or $250, that is paid for by the option money, $850, what happens to the other $600, which is the amount not used to buy the shares, because the shares only cost $250. does the 600 go into my account or do I only get it when I exercise the option.>>> If you bought the option for $8.50 the $850 for the option was taken out of your account at the time you bought the option. Since that money is no longer in your account, you can not use any of iit again to exercise the option. Instead you have to pay another $2.50 per share ($250 per contract) to buy the stock if you exercise the option. <<<If this were a true scenario would it be a bad idea to exercise the option if the option went up any??>>> You can almost always make more money by selling an option instead of exercising it. In your example you gave prices where that would not be true, which is the reason the first answer you received thought the values you indicated were unrealistic. Before you open a position, such as buying a call option, you should have already decided under what circumstances you would close the position. Different traders have different guidelines they use about when they will sell a position, and I do not know an one set of criteria I would call the best, but I can say that deciding you will close a position as soon as you have any profit is probably not a good criterion. <<<I’d still be getting all those shares at $2.50, Right?>>> Right. But you do not get the $8.50 you paid for the option back, so your effective price is $8.50 + $2.50 = $11.00. <<<This may be a stupid question, but I was wondering how I would exercise an option on a scottrade account. I don’t have an options account through them yet, but I do have a regular account and an ira. Would there be something that I push to tell it to exercise the option or would I have to just sell them.>>> I have never had a Scottrade account, so I do not know how they do it. My understaning is that some brokerages have a separate screen you use to exercise an option from the web. Others, including my brokerage, do not have any way to exercise an option on-line. Instead I have to call them on the telephone to exercise an option. Selling an option is not the same thing as exercising an option. If you want to exercise an option do NOT sell it. After you buy an option it will reamin in your portfolio until one of three things happens: You sell it. You exercise it. It expires. Those three things are mutually exclusive. Once any one of them happens the option is no longer part of your portfolio so neither of the other two can happen.
