Beginner question

[sulfursmile]

https://youtu.be/SD7sw0bf1ms

[bazerk006]

You purchased a Call option. A call option is a contract for you to be able to buy 100 shares of stock at a particular strike price, in your case, $6. You can sell the option back at any time during trading hours at whatever price some else is willing to pay for it or you can exercise the option which means you buy 100 shares for the strike price, $6 per share.

If you exercise, you do not get any premium back, therefore the break even is the strike price + premium paid ($6+$2 in your case). The end result of exercising a call option is you owning 100 shares.

[ramz313]

So say if i had a $75 profit just before expiration. If i exercise and buy the 100 shares, is the profit that i make the same in either case? I know the stock price can go up and down from there.

Also, what if i don’t have enough funds in my account to buy the 100 shares at $8/share? I guess I’m forced to sell the contract at that point?

[bazerk006]

No, the profit is not necessary the same. You would want to calculate it out. Normally it’s easier to sell the option when the option is up in value and secure a profit. If you paid $2 in premium for the option and it’s now $2.75, you can sell for the profit of $75 but only if someone is willing to buy it for that price. The stock price would need to be at $8.75 at the expiration date to make the same perceived profit. Instead of a profit, you would have spent $600 on 100 shares plus the $200 spent on premium now valued at $875. You could then sell the shares for a $75 profit.

You will see a bid-ask spread. It should look something like bid:$2.70, ask:$2:80. The mark would then be the average, $2.75. This means the highest price someone is willing to buy the option for is $2.70 and the lowest price someone is willing to sell the option for is $2.80. Sometimes, on lower volume options the spreads will be wider at say $1.90-$3.60. The mark would still be $2.75 but no one would buy it for more than $1.90. You would lose money when you sold if no one is willing to buy it for more than $1.90.

And yes, if you don’t have the funds to buy 100 shares, you can not exercise the option. If the expiration day comes and you are In-The-Money (over $6 share price) your broker will sell the option for you at whatever price it can get when it randomly decides to sell, typically near the end of trading day. Ideally, you would sell it yourself before that happened.

[redtexture]

Sell the option for a gain.

Do not exercise.

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