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Lets say, I want to buy a call option whose underlying stock has long term potential but there are some near term risks. I want to wait and see how the stock performs for a few months and buy if it is able to overcome some hurdles (with potentially price increase).

In this scenario, does the strike price matter? Can I choose large strike price to keep the options price low and exercise the call before expiration even if the strike price is not met?

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    Why would you exercise the call if the strike price is greater than the market price? Wouldn't it be cheaper to buy the stock at the market price (and let the option expire worthless)? – Flux May 22 at 7:31
  • If the intent is to buy the stock, then buy the stock. If the intent is to buy the stock only if the price increases, then buy an at-the-money call option. If the intent is to buy the stock only if it is above a particular price but possibly below the current price, buy an in-the-money call option. – Flux May 22 at 7:34
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You can select a high strike price (aka out-of-the-money) to reduce the cost of the call but you have to take into consideration whether you are willing to pay that strike price (plus the premium paid for the call) for the stock when you are ready, willing and able at some future date to purchase it. So yes, the strike price does matter.

It makes no sense to exercise the call to acquire the stock if the stock's price is less than the strike price. Why would you pay the higher strike price when the shares could be bought at a lower price on the open market? I can't speak for all brokers but my broker does not permit one to exercise OTM calls.

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Can I choose large strike price to keep the options price low and exercise the call before expiration even if the strike price is not met?

Sure - but why would you exercise an OTM call when you can just buy it in the market for a lower price? And why would you want a higher strike price, which means that your purchase price is higher? (other than just for a smaller premium of course).

The payoff of a long call is identical to the payoff of buying the stock and buying a put. You are effectively buying the stock but protecting yourself if the price goes below the strike. So the strike price matters as it determines your level of downside risk.

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  • You are effectively buying the stock but protecting yourself if the price goes below the strike. So the strike price matters as it determines your level of downside risk. In terms of risk profile, that is completely true. It's not a criticism but that is a bit esoteric for someone who does not have a deep understanding of options. – Bob Baerker May 22 at 13:55

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