I bought a BABA call option this morning. $277.5 call, $2.87 price, expiration date nov 27. The contract is now worth $4.80. If I sold now would i make $210? (4.8 * 100) - (2.87 * 100). Also, it says my break even price is $280.26. What does that mean? Thanks.
2 Answers
The contract is now worth $4.80. If I sold now would i make $210? (4.8 * 100) - (2.87 * 100)
Correct, assuming that $4.80 is the bid price, not the ask. (less any commissions, of course)
it says my break even price is $280.26. What does that mean?
That means that the price of BABA must be above $280.26 at expiry for the option to make a net profit if you hold it until expiry (including the premium you paid). If BABA is at exactly $280.26 at expiry, you will make $2.76 on the option, which cancels out (most of) the $2.87 you paid in premium (I can't account for the other 11 cents - maybe the actual premium was 2.76 and you paid 11 cents in commissions?). If it closes higher than that you'll make more on the option and have a net profit.
Your option can still be profitable before expiry even if BABA is below the break even price, because of the time premium of the option, which is a more complicated subject.
There are some small math errors in the information that you provided as well as the answer that you received.
If you paid $2.87 for your call option, your cost would be $287 plus a very small SEC fee about 10 cents. Let's ignore the SEC fee.
At a cost of $2.87, your break even point is $280.37 not the $280.26 that you posted. The only way that this is not an error and you could have paid less than $2.87 would be if you received a maker/taker rebate from the exchange that your order was routed too. So your cost basis is either $2.87 (what you think you paid) or $2.76 (based on your broker's break even information).
If the contract is now worth $4.80, you have a gain of $193 or $204 depending on what the actual cost basis is.
All of the above assumes that you do not pay commissions.