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I bought an XYZ $50 call for $5. Expiration is in two weeks. The day after I bought the option, there was news about a data breach and the stock's price dropped to $25. I know that the stock is not going to recover in two weeks but I want to sell the option and get some money back. Will I get paid only the bid price of the call when XYZ is $25? For example, if that price is $3, can I sell the call and recoup $300? That means a loss of $200.

Let's look at another scenario where XYZ went up to $53 and then crashed to $25 the day before expiration. Since the bid price at $3, can I recoup $300?

In these two two cases, does it mean that when the premium has lost its value mean that the option is losing the value? Does the value matter if the price of the same stock is above the strike price, for example the stock price is $60 on the day of the expiry?

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If you bought a two week $50 call for $5 with the stock near $50 and the stock dropped to $25 then in order to salvage $4.50, the stock is going to have to rally back to $50 to get near break even - probably even higher than that because of time decay.

If the stock dropped to $25 with two weeks before expiration, you'd be lucky if the bid on your $5 call was worth more than 10 cents. IOW, $490 lost. The day before expiration, it would effectively be worthless.

If the stock price is above the strike price at expiration then the call will be worth its intrinsic value (stock price minus strike price). So at $60, your $50 call would be worth $10.

If the option is worth less than what you paid for it then yes, the option is losing value.

  • I updated the ticket. You can update your previous answer based on my updated question. – wonderful world Dec 7 '19 at 21:41
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    Answer updated. – Bob Baerker Dec 8 '19 at 4:11
  • To confirm, if the stock price is at $60, I will make ($10 x 100) - ($5 x 100) = $500 profit. – wonderful world Dec 8 '19 at 4:19
  • That is correct. – Bob Baerker Dec 8 '19 at 4:24
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A stock that's at 50% of the strike price of an option you own, and only 2 weeks to expiration would take a huge gain to be in the money. I'd be surprised if it were trading at price you mention. The chance of it recovering in a year is slim. 2 weeks? Near zero.

  • Two options that I have is allow the option contract to expire or recoup some from the premium that I paid. Is that possible in the case when the price drops but there is more time before the expiration. – wonderful world Dec 8 '19 at 0:31
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    Yes, but the value left is minimal. As I tried to state, 100% gain to the strike with just 2 weeks to go? If this is an actual situation, tell us, what is the bid/ask on this option? – JTP - Apologise to Monica Dec 8 '19 at 0:38
  • It is not an actual situation. I just made up the numbers to understand profit/loss and any way to recoup any amount even if it is $10. Why should that premium to be given to the seller. – wonderful world Dec 8 '19 at 0:44
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    I’d recommend you look at the Black-Scholes model. Even without looking at it, I’d guess the premium is less than the commission with this kind of drop. It’s ok to want to not lose 100%, but I tend to treat options as a bet, and tend to ride out the time till the end, all or none. – JTP - Apologise to Monica Dec 8 '19 at 0:50
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    Yes. For the naked call buyer, your loss is limited and gain, unlimited. There are many option strategies. Some of which actually fall into the category of 'investing' and others which are really considered gambling. I recommend the writing of Lawrence G. McMillan. His "McMillan on Options" is considered by some to be the 'bible' of option trading. Last, see my article Apple 2018 call spread an example of my own strategy. Not updated my current positions there, I need to make time to do that. – JTP - Apologise to Monica Dec 8 '19 at 11:45

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