I have a question regardnig call options. For example:

108-strike AAPL options expiring Dec 24th are 83 cents. That means the cost of one contract would be 83 + 5 (commission) = 89 dollars approximately. This means to make a profit on this contract, the price would have to go up to about 108.88, yes?

Now, if the spot price is 110 at any time during the week, I can choose to exercise this contract or sell it. If I were to sell it, what would be the profit I make since I would cost too much to exercise?


The other two answers seem basically correct, but I wanted to add on thing: While you can exercise an "American style" option at any time, it's almost never smart to do so before expiration. In your example, when the underlying stock reaches $110, you can theoretically make $2/share by exercising your option (buying 100 shares @ $108/share) and immediately selling those 100 shares back to the market at $110/share. This is all before commission.

In more detail, you'll have these practical issues:

  1. You are going to have to pay commissions, which means you'll need a bigger spread to make this worthwhile. You and those who have already answered have you finger on this part, but I include it for completeness. (Even at expiration, if the difference between the last close price and the strike price is pretty close, some "in-the-money" options will be allowed to expire unexercised when the holders can't cover the closing commission costs.)

  2. The market value of the option contract itself should also go up as the price of the underlying stock goes up. Unless it's very close to expiration, the option contract should have some "time value" in its market price, so, if you want to close your position at this point, earlier then expiration, it will probably be better for you to sell the contract back to the market (for more money and only one commission) than to exercise and then close the stock position (for less money and two commissions).

  3. If you want to exercise and then flip the stock back as your exit strategy, you need to be aware of the settlement times. You probably are not going to instantly have those 100 shares of stock credited to your account, so you may not be able to sell them right away, which could leave you subject to some risk of the price changing. Alternatively, you could sell the stock short to lock in the price, but you'll have to be sure that your brokerage account is set up to allow that and understand how to do this.

  • In the event I exercise on the expiration date, these problems would be a non-factor since there would just be a simple cash settlement, yes? Thank you for your response. – user3874530 Dec 20 '15 at 20:17
  • No, if you have an option for a stock, exercise will be settled in the stock. Most standardized stock options have Friday expiration and are settled over the weekend. There are index options that are cash settled. Since specified AAPL in your example, however, you're not talking about that type of option. In addition, index options are mostly "European style," which means that you can only exercise them at expiration. This in contrast to stock options, which, as I mentioned in my answer, are typically "American style" meaning that you can exercise them any time. – user32479 Dec 20 '15 at 21:18
  • So I'd have to actually purchase the 100 shares at said strike price? Or can I choose to sell the option contract to someone else who could exercise it? – user3874530 Dec 20 '15 at 22:39
  • If you exercise a call for 100 shares, you will get 100 shares and be debited cash 100*strike + commission. You can then hold the shares or flip them. You can also (assuming there's a buyer) sell the contract itself in the same way that you bought it. For AAPL, there's generally enough active interest to make that feasible. For a less traded security, there might not be a good market. (Although it's not your problem, the person who buys your contract may not exercise it, especially if they were short - aka wrote - a call contract and they're trying to get out of their option position.) – user32479 Dec 20 '15 at 23:51
  • Thank you! This makes a ton of sense now. I would probably make more if I were to actually exercise the call, but would need the money to be able to buy 100 shares. Selling the contract itself seems more feasible. – user3874530 Dec 21 '15 at 0:58

Depending on the day and even time, you'd get your $2 profit less the $5 commission.

Jack's warning is correct, but more so for thinly traded options, either due to the options having little open interest or the stock not quite so popular. In your case you have a just-in-the-money strike for a highly traded stock near expiration. That makes for about the best liquidity one can ask for.

One warning is in order - Sometime friday afternoon, there will be a negative time premium. i.e. the bid might seem lower than in the money value. At exactly $110, why would I buy the option? Only if I can buy it, exercise, and sell the stock, all for a profit, even if just pennies.

  • Answering your question: At exactly $110 you might also buy the option if you are already short a contract (i.e. wrote a contract earlier) and don't want the "pin risk" of maybe or maybe not having to deliver the underlying stock when someone else exercises the option that you already wrote. – user32479 Dec 21 '15 at 16:10

Marketwatch reports that the 108 strike call option sells for 1.45, down 1.53 from yesterday. If we split the bid and ask you get 1.415. That is what that contract will, likely, trade at.

The biggest problems with options are commissions and liquidity. I have seen a commission as high as $45 per trade. I have also seen open interest disappear overnight. Even if you obtain contracts that become worth more than you paid for them you may find that no one wants to pay you what they are worth.

Track your trade over a few weeks to see how you would have done. It is my experience that the only people who make money on options are the brokers.

  • That option is bid/ask .78/.83 I don't know where you got the $1.45. – JTP - Apologise to Monica Dec 20 '15 at 16:04
  • The commission I am paying is 4.95 per trade and 0.25 per contract. – user3874530 Dec 20 '15 at 18:21
  • A commission between $5-10 is typically. If you're paying $45/trade you are doing something very wrong. (Although I'd be VERY happy to be your broker.) – user32479 Dec 21 '15 at 0:07

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