Basic question about options

[CXMelga 0]

Hello All,

I am brand new to options so just starting to learn, can someone please help me with the following question. I realise these questions may seem stupid to an experienced options trader, but will all have to start somewhere

I understand an option has a time limit e.g. will expire in X days from date of purchase.

So, let's say I purchase a call option for stock ABC at $100 and the option has a 30 days life time. Now lets assume ABC stock is trading at $200 in 20 days time 

What are my options here, in other words can I exercise the actual option and buy the underlying share for $100 each (e.g. 100 shares at $100 = $1000, but the shares I end up with are worth $2000 right now), or is that not the point of options trading and you never actually buy the underlying asset ?

Or (depending on the answer to the above question)

Can I sell the option itself (never actually exercising the option to buy the share) giving someone else the option to buy stock ABC at $100 a share (at least for the next 10 days until the option runs out) ?

if I could/did sell the option as above, I assume the option I purchased would have some value (e.g. attractive to a would be buyer) as it gives them the right to buy something at a discount, correct ?

What happens as the option gets closer to its expiry date (most things in life become less valuable as they approach their expiry date), so for example assuming ABC stock stays at $200 per share for the last 10 days of my options life. If I sell my option on day 21 will I get more for it than if I sell it on day 29 ?

 

Thanks all

CXMelga  

 

 

 

[Arthur 32]

These are legitimate questions for a beginner.

So, after 20 days your call option is "in the money", having an intrinsic value of $100. Yes, you could exercise your call option and buy the underlying shares for $100 each thus making a profit of $200-$100=$100 per share (minus the initial price of the option). Please note that you would need to have $10,000 to be able to pay for 100 shares.

However, in general, in a liquid market, it never makes sense to exercise an option - because you could just SELL the option at a higher price than $100.

Let's assume that after 20 days the price of your call option is $120 ($100 intrinsic value + $20 time value). If all other factors (price of the underlying stock, implied volatility, interest rate...) remain constant, then the time value will decrease as the option gets closer to its expiry date. On the last day before expiration, the time value will get close to zero and the price of the option will be very close to its intrinsic value ($100).