Following the Three Ways to Buy Options article from NASDAQ, there are supposedly three different ways to trade options after buying them:
- Exercise the option at maturity
- Exercise the option before maturity
- Don't exercise the option
Specifically, the article's examples all describe situations in which a speculator exercises the option to buy the underlying and then sells those shares against the then-prevailing price. I've looked at other sources too and they also only mention these 3 specific methods.
Not having any prior experience with options, I was wondering why I can't simply trade the options themselves. Option prices move with the movement of the underlying so in theory I could simply trade the option itself without every needing (or wanting) to hold shares in the underlying asset. This is, of course, with the premise in mind that I trade before maturity.
As a simple example:
- I buy 1000 call options at a price of $ 3.00
- The underlying asset goes up and therefore the price of the call as well (e.g. to $3.10)
- I sell my 1000 call options for $3.10 and make a 1000x0.10 = $100 profit
In this simple example, I never actually buy or sell shares of the underlying. I am quite positive that this sort of option trading should be possible as my intuition would be that only the initial seller of the call (or put) option has an obligation to the final holder. Therefore trading options before maturity, purely as a leveraged product, should be possible.
Naturally, this sort of trading would entail a lot of risk but the article is making me doubt whether this is possible at all (mind you: no experience). So is this possible?
Adding to this: if I have a brokerage account of, let's say, $1000, am I allowed to buy $1000 worth of call options? Considering, herein, the fact that I am unable to actually buy that many shares of the underlying as that would be much more than $1000.