Stocks and Trading Thread - Channeling your inner Mono

[Habbaku]

I couldn't parse it either. 

[crazy canuck]

I think he is getting confused with the value of the option and the strike price of the option?

[Admiral Yi]

Another important caveat Squeeze: I've read about different kinds of options, American style and European style.  They differ in that with the American style the buyer can exercise the right to buy at any point up to expiration.  With European style the right to buy is exercised automatically at close of market on the expiration date.

You being in You Kay, I don't know which type is available to you.

[Josquius]

So options cost a lot less than actually buying the stock for a price would?

Yes.  For the $354 cost of that call the buyer could have bought a little over half a share.

You buy an option of $10 for 50 cents and its effectively a gamble on the stock price rising by more than 50 cents so there value in using it to buy stocks/people will want to buy it so they can buy stocks?

I'm a little confused by this question. 

I mean; stock price is $10 and you buy an option to buy for $10 at 50 cents.
Thats essentially a gamble that in the future, the stock price will be more than $10.50, as thats the only circumstance in which you'd be making money there.
Right?

[Admiral Yi]

I mean; stock price is $10 and you buy an option to buy for $10 at 50 cents.
Thats essentially a gamble that in the future, the stock price will be more than $10.50, as thats the only circumstance in which you'd be making money there.
Right?

Not quite.  First, you can buy a call at virtually any price, it doesn't have to be the market price of the stock at the time you buy the option.  In my Tesla example, the stock was trading at $660/share when I sold the call at a strike price of $750.  That call was a bet the price would rise to $750.

The second thing you have to understand is that options include a time value.  Even if the market price has not yet reached the strike price of the option, the price of the option will rise because of the *possibility* it will rise before the option expires.  So if on day one of my Tesla option the price had risen from $660 to $680, the cost of the option would have risen too, because even though it was still not "in the money," there was an increased chance it would be in the money in the 12 or so trading days left before it expired.  As the days tick off, that time value will shrink because there are fewer days left in which the market price can change.  At the very end of the option period the option price will get nearer and nearer to the difference between the market price and the strike price because the time value is approaching zero.  Back to my Tesla example, toward market close on the Friday when the contract expired the price of the option was $106, which was very close to the difference between the strike price ($750) and the market price ($856).

[crazy canuck]

In other words Tyr, the option itself is traded and while the value of the option may be influenced by the stock price is it just the option to enter into a future contract to purchase that is being traded.

[Admiral Yi]

So to use your example Squeeze, you would break even if you bought an option with a strike of $100 for a cost of 50 cents and the share price rose from $100 to $100.50, but that's only true on the last second of trading before the option expires.  You would make money if the share price rose to$100.49 on day one of the option, because the option price would now include the 49 cents *plus* it would still have several days of time value.

[Habbaku]

GameStop opened at $88, closed at $148, is up to ~$220 after hours. Elon Musk is tweeting them and is in the WallStreetBets Discord.

Lord save us all.

[HVC]

GameStop opened at $88, closed at $148, is up to ~$220 after hours. Elon Musk is tweeting them and is in the WallStreetBets Discord.

Lord save us all.

This is the stock that Reddit randomly picked to troll hedge funds, right?

[Habbaku]

Among others, such as BlackBerry, yes.

[crazy canuck]

GameStop opened at $88, closed at $148, is up to ~$220 after hours. Elon Musk is tweeting them and is in the WallStreetBets Discord.

Lord save us all.

I guess Mr. Musk doesn't care too much about securities regulator fines.

[DGuller]

In my Tesla example, the stock was trading at $660/share when I sold the call at a strike price of $750.  That call was a bet the price would rise to $750.

Am I not understanding the terminology correctly?  If you sell the call, aren't you the one hoping that the stock price doesn't rise to the level when the call is excercised?  The guy who bought your call is the one praying for a well-time Musk tweet.

[Admiral Yi]

Am I not understanding the terminology correctly?  If you sell the call, aren't you the one hoping that the stock price doesn't rise to the level when the call is excercised?  The guy who bought your call is the one praying for a well-time Musk tweet.

The person who bought the call now owns the call, and he has made an upside bet.  So the call is an upside bet.

[DGuller]

Am I not understanding the terminology correctly?  If you sell the call, aren't you the one hoping that the stock price doesn't rise to the level when the call is excercised?  The guy who bought your call is the one praying for a well-time Musk tweet.

The person who bought the call now owns the call, and he has made an upside bet.  So the call is an upside bet.

Oh, I misread the sentence.  I originally read it as you making a bet on Tesla stock price going up by selling a call.

[Admiral Yi]

I just took a look.  Gamestop puts are *not* cheap.