Yesterday I bought LB put option with a 5 strike for .28 expires in 21 days. Whenever I bought the put, the premium(ask) went up to 4.90. I understand that you can make money selling the premiums only. I was wondering if I could do the same thing here even though I am out of the money. My account value changed by +245. The bid is 0 which may have an issue from what I've heard. Also whenever I went to sell to close, it charges me $28 minus the .65 commission. Not sure why it's doing that. So is it possible to profit off of my put if the the stock price is above the strike?
An option can be traded at any time. There are 3 main reasons why an option price will change:
- Underlying price of LB stock moves
- Implied volatility increase or decrease
- Time decay, the non-intrinsic premium of your option will slowly decay over time and go to zero until the time of expiration when essentially the option is worth only its intrinsic value.
Since you are new, a few things to keep in mind.
- Only buy liquid options, it sounds like your option is very ill-liquid. Look at the bid/ask spread when buying, if its very wide stay away.
- On less liquid tickers, stick to the monthly options and usually stick to round numbers, those seem to be the most liquid.
- Look at the open interest of your strikes, the more the better
But now that you are already in an option that is not liquid, make sure you use a "limit" order when executing any trade, so sell this option I'd set a limit order just under the current "ASK" price and let it sit.
The short answer is yes. You can make a profit, on puts or calls, when the options are still out of the money. In order to do so, the difference between what you paid/sold the option for in the first transaction has to be greater than what you can sell/pay for the closing position and commissions need to be considered and possibly tax liability.
When reading "how-tos" about options authors typically ignore commissions and taxes for simplicity, but it makes certain strategies appear much more appealing then they actually are. Strategies like the "Iron Condor" have to pay 4 commissions to open, and potentially 4 to close. That can be expensive.
However, selling out of the money options is how one can make real money given the right situation, fearlessness, and good timing. Rolling puts, in the latest market, might have proven very profitable. I would imagine that one could have turned a modest investment (like a couple of thousand) into something approaching one million. Again this would have required excellent timing, courage, and picking the right stock to bet against.
You can make money buying or selling options if the stock cooperates. Timing is everything.
Avoid selling options until you really understand options and you are an experienced investor/trader.
As for LB, it normally has an implied volatility of about 50%. At that level, you 4/21 $5 put would have a theoretical value of ZERO. Because the market has collapsed, implied volatility has expanded tremendous;y, hence the reason your put was so costly.
Apart from the delta of an option representing how much an option will move per dollar move in the stock, it's also a rough estimation of the probability that the option will expire in-the-money. It expands when implied volatility increases. The delta of your put is about .06 which means per the statistics of the pricing model, there's about a 6% chance that the stock reaches the strike price. And that's an exaggerated high delta valuation due to ultra high implied volatility. What I'm saying is that your betting on the 20 to 1 horse in the race. It's a great pay off if you're right but most of the time it's a losing bet. Good luck and I hope that you defy the odds :>)