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Yesterday I read an article about how someone was able to turn $ 200 into $ 113,000 in just one day by buying call options on a particular stock. The article also showed a screenshot which appears to have been shared by one individual who claims to have made quite some money with this trade.

I have never traded with options before so I was wondering and curios how this is even possible and so I tried to figure out how this particular example worked out. I'd just like to verify my train of thought and whether or not I understood options as such. Be it on a rather.. unlikely example.

It says that the user purchased 98 contracts. I have no real reason to believe that each contract stands for 100 shares but dividing the market value by 98 * 100 gives $ 11.95 - the "Current Value".

So, what this means, at this time he held 98 contracts, representing 9800 shares where the price of a contract for one share is $ 11.95, is that correct?

Further, calculating

$ 11.95 / $ 0.0577 = 207.10

gives us 20,710.57% of increase in value. Hence I have to assume that the price of a contract for one share was $ 0.0577 which should mean that the user invested $ 565.46 here. Is this correct as well?

Assuming my reasoning here is correct, I still wonder how this money can be realized at this point. It states that the market value is $ 117,110 - but this refers to the contracts themselves and not to the shares.

One last qantity I'm missing here is the strike price.. I think we can get it by computing:

$ 69.78 - $ 117,110 / 9800 = $ 57,83

However, how can this position be sold? Assuming the above is correct to far, I can think of two ways:

A) Buy shares at strike price and sell them on at market price

We could buy the shares at a strike price of $ 57,83. This would mean we could buy 9800 shares at $ 57,83 giving us another position worth $ 566,734 which we could try to sell for $ 683,844 (current share value $ 69,78). This gives us

$ 683,844 - $ 566,734 = $ 117,110

of profit.

B) Simply sell our options

Since we have 98 options, each representing 100 shares, we could simply sell our options

$ 11.95 * 9800 = $ 117,110.

So this should mean that A) and B) are equivalent (as it should be imo).

Is my reasoning correct or am I missing something? I do realize that this kind of trade is very, very unlikely and that there is a fair share of risk involved. After all this bet was probably set on just one day so he could have easily lost $ 565 on one day just like that. Any further information on why the contract value might go up by such an amount would be interesting to know as well.

Thank you for any feedback on this example.

enter image description here

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3 Answers 3

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This question is a hot mess full of incorrect assumptions so here's the Cliff Notes version of what's going on here.

The average cost per call is $0.057652 (about 5.77 cents). Since an option is for 100 shares, the average cost per call would be $5.7652 and 98 calls would cost $564.99

If the call's value rises to $11.95 then the 98 calls are worth $117,110 for a profit of $116,545.01

You cannot calculate the strike price from the given information unless these were contracts that expired on Friday. If they were then it would be a reasonable guess that the strike price was $58. That would mean that at $69.78, the intrinsic value would be $11.78 and since the screenshot says a value of $11.95, 17 cents of time premium just before expiration would be realistic.

If a long option has time premium remaining, it makes more sense to sell it rather than to exercise it. That's because exercising the call throws away the remaining time premium (17 cents per the quote provided in this question).

However, ITM calls often trade below parity (the bid is less than the intrinsic value) if expiration is near and/or there's a pending dividend. If that's the case, you'll take a haircut by selling it. If your intention is to close the position for maximum gain or minimum loss (no share ownership), in the case of a long call, short the stock first and then exercise the call, assuming you have approval as well as the margin to support the trade (you may haver to scale out of the position if you don't have the margin). That locks in the intrinsic value and avoids the haircut.

BTW, was this stock GME? It was up $21.98 yesterday and that explains how this is all possible.

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    As I surmised, this was Gamestop. Wagers like this call purchase are lottery bets. Most of the time they lose and once in a blue moon they hit big.
    – Bob Baerker
    Jan 24, 2021 at 17:03
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    Yeah, it's like a slot machine basically. You put some $ in and most of the time you leave the casine without anything. I couldn't afford bets like this but the reason why I was digging into this was because I just couldn't see how I can calculate the market value and well.. then I decided I want to understand options a bit more. So far I only invested in single stocks. Nothing too exciting. But thank you for shedding some light on this for me!
    – Stefan Falk
    Jan 24, 2021 at 17:08
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    You're welcome. One of the overriding characteristics of people who tell you about their winning trades is that they don't tell you about their losers. If the trader in question hit big without a long string of losses, good on him. But the harsh reality is that most traders lose money , more so with those who speculate with cheap options as in this question.
    – Bob Baerker
    Jan 24, 2021 at 17:29
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    Yeah. I think it's rather easy to see whay it's much easier to lose money here than win some. Hence the slot machine comparison is probably not too far from the truth. There's obviously a good reason why you can even buy options this cheap. It's probably inversely proportional to the risk you take.
    – Stefan Falk
    Jan 24, 2021 at 17:44
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    I guess have to read up a few more things before considering my first trade with options. I googled those terms and I gound that gamme and delta are definitely two variables that I should take another closer look. I think I got the overall idea but I'll use pen and paper for the next one :D
    – Stefan Falk
    Jan 24, 2021 at 19:27
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Approach A is less profitable because options normally contain a premium (time premium) because they may go up until they expire. That premium is the larger the more time still is in the option and is called Theta. Over time the option approaches the value of execution. The problem is that if you execute and there is time left, you basically take the Theta and burn it.

Approach B sells the option without destroying the value in Theta. As such, it is ultimately superior to Approach A in pretty much every scenario.

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  • Approach A can be superior: The bid for an in-the-money option near expiration often trades for less than the intrinsic value. If you accept that discounted price when you sell to close your option then you receive less than the intrinsic value of the option. For calls, to avoid this 'haircut', it is more profitable to short the stock first and then exercise the calls. The reason that one shorts the stock first before exercising the long calls is that doing so eliminates the market risk of the shares dropping after share purchase, before exercising the long calls.
    – Bob Baerker
    Jan 25, 2021 at 14:37
  • Ah, no? They generally DO NOT TRADE AT ALL - if you accept a quote provided then yes, you are not doing your job. If you put in a properly priced offer, someone is likely to take it.
    – TomTom
    Jan 25, 2021 at 14:39
  • On Friday, look at expiring options for stocks like AAPL, GOOG, NFLX, SPY, etc. The ITM options will TRADE ALL DAY LONG, many at a discount. For illiquid issues, the discount from intrinsic value will be even worse, making it even harder to get a good fill. This isn't about putting in a properly prices offer to close the option. You can always sell an ITM option but there is no incentive for the market maker or any other trader to give you the full intrinsic value and the only way to avoid that discount is to exercise and sell, though ideally in the reverse order if you have the margin.
    – Bob Baerker
    Jan 25, 2021 at 15:03
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enter image description here

What's unusual for your example is the fact that the stock rose so far so fast. The trade above was entered 2 years ago. With a lower percent return. It ended last week, Jan 15. Along with 2 trades that returned zero. One week later, the two bad trades would have been 10X and 20X returns. If you go to Vegas and bet 28 on the roulette wheel, it will come up now and then.

I wonder what that option player's record is, overall. Very possible he's just breaking even over time.

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