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I noticed that there are many call contracts on GME at a strike of $800 that expire in 5 days. Currently the price of GME is at $110.

Picture from yahoo finance

I'm just wondering why anyone would go for such a high strike ? Wouldn't it be wiser to buy a call at a lower strike point ? I mean, if GME actually ends up at $800 by the end of the week, then anyone who buys that option is barely breaking even.

If someone actually believes that GME will go to $800, wouldn't buying a call option at a lower strike point give them more of an oportunity for profit ?

Sorry if my question seems very basic, but I just started learning about options.

Thanks,

Liam

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if GME actually ends up at $800 by the end of the week, then anyone who buys that option is barely breaking even.

If someone actually believes that GME will go to $800, wouldn't buying a call option at a lower strike point give them more of an oportunity for profit ?

Yes. But if GME goes to $900 then they would make ~80x on the $800 call. That is the basis for demand for such options: not that GME could go to the strike, but that it could go well above the strike.

I wouldn't be buying that option myself, but evidently someone is.

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  • Thanks for reply @nanoman. I just dont get how they could be making 80x. If the stock goes up to $800 or more, then they can buy 100 shares of GME at $800, right ? If they buy GME that is traded at lets say $900, at a price of $800, then isn't that a profit of only around 12% ?
    – Liam F-A
    Mar 1, 2021 at 18:35
  • @LiamF-A They can sell (rather than exercise) the option, which will be worth at least $100, or ~80x what they paid for it.
    – nanoman
    Mar 1, 2021 at 18:38
  • Oh ok. I didn't know you could do that. Is that what they mean by "naked options" ? Since here they'd be selling their option contract without actually owning the 100 shares?
    – Liam F-A
    Mar 1, 2021 at 18:42
  • Yes they can "sell to close" which is different than a naked short. However, they could still exercise the option and make a 80X profit relative to the cost of the premium. They would pay 1.30 for the option and profit 100. They just run the risk of GME going down between expiry and when they can sell (much less risk to just sell to close)
    – D Stanley
    Mar 1, 2021 at 18:48
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    @LiamF-A It's naked if you sell (write) a call you don't already own and don't own the underlying stock either. Here we're just talking about "selling to close" a long call position (long means owning a positive number of contracts). Buying and selling long options has limited risk since the most you can lose is the price (premium) paid.
    – nanoman
    Mar 1, 2021 at 18:51
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You have assumed that everyone who is buying GME $800 strike calls is betting on the stock rising significantly by Friday. That's not the case because there are many other option strategies that might involve buying or selling that call.

Someone who is short the call could be buying to close the position. Or perhaps he has a profitable call credit spread and is closing it to book profits. There are many other reasons for possible the trades.

Options provide leverage and they can provide large gains before expiration. It's not a good trade because the implied volatility is sky high, hugely inflating the premium. If GME doubled in price today, the $800 call would be worth 10 times its current price.

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