There is one thing I do not get about trading options (let's restrict this to calls), and no online resource I've come across seems to talk about the following scenario. There are 3 parties in this: A, B, and Me.

Feb 1: XYZ is trading at $100. I DO NOT own XYZ. I buy 100 calls for a $2 premium, so that's $200. The contract expires on Feb 24.

Feb 9: The CEO of XYZ marries Trumpf's daughter, Bianca, and XYZ jumps to $109. Now, this option is selling at, let's say, $6.

Feb 10: Let's assume, that the option price remains at $6. I decide to sell the option to "A". I make $400 = $6*100 - $2*100.

Universe I: At expiry date, "A" does not exercise the option regardless of its appreciation or depreciation. Feb 24: I walk out with $400, and I don't have to worry about anything anymore.

Universe II: Option price HAS remained constant until expiry date. "A" decides to exercise the option. Feb 24: I do not own XYZ, what happens?

Universe III: Option price HAS increased substantially. "A" decides to exercise the option. Feb 24: I do not own XYZ, what happens?

Universe IV: Option price HAS increased substantially. "A" decides to SELL the option to "B". Feb 24: I do not own XYZ, did "A" just LIFT any liability off of me?

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    In each of these scenarios you sold all your options, so you're no longer involved in any way. The option represents a contract between the holder and the originator, and you are neither. So the answer in all cases is "nothing happens" to you. – dg99 Jan 26 '18 at 23:54
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    -1 for needless politics "marries Trumpf's daughter". – RonJohn Jan 27 '18 at 1:53
  • @RonJohn you're fun – ToniAz Jan 27 '18 at 2:01
  • @dg99 Originator, aha! Thank you for the input. I haven't came across this word in everything I've read. – ToniAz Jan 27 '18 at 2:05
  • The correct term is "option writer". Google (with the quotes) and you'll see. It's the same as the seller. You can try to buy all you want, it's the seller that creates the contract. – JTP - Apologise to Monica Jan 27 '18 at 13:47

Your example lacks a bit of information. Such as the strike price. If on Feb 9, the stock is $109, and option $6, let's assume the strike is $105.

You sold the contract. You bought for a $2 premium and sold for $6. While your wording is ambiguous, you imply that you bought/sold one contract for 100 shares. When you sold for $6, you are done. But your outcomes are a bit odd.

U1 - The buyer lost his money if the stock closed at $105 or lower. A few cents above $105 and his broker will execute automatically. He may wake up Monday morning with 100 shares he didn't really want to own, and if the stock opens lower, he may lose money. To be clear, exercise at expiration is automatic.

U2/U3 - as long as the option price is above a cent or two, "A" can sell or exercise, his choice up until expiration. You are no longer part of the contract, you sold it 2 weeks ago.

U4 - Still, you have nothing to do with this. Options can, and do, trade back and forth among many parties right till expiration.

There are 450 questions here tagged "options". I invite you to read through those that interest you and gain some knowledge, especially before you consider any trade. Options are an interesting topic, and despite their potential for gambling, they can also be structured to reduce one's risk and increase potential gain.

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    Thank you for taking the time to write this fantastic answer! I thought that when you buy an option then sell it, the person you sold it can ask you to deliver the shares to them. – ToniAz Jan 27 '18 at 20:01
  • Toni, when you sell, it's over, someone else has taken over that obligation. – JTP - Apologise to Monica Jan 28 '18 at 0:28

Your mistake is that you are thinking that you can sell the option to A. When you buy an option you purchase it from the market maker. When you sell an option, you sell it to the market maker. If A happens to come along and buy the offsetting option, they are not buying it from you, they are buying it from the market maker. All option contracts are "one-sided," in that if I write a call and you buy a call, I did not write your call. I wrote a call for the market maker and the market maker sold you a call.

While it is true that the market maker is neutral in that position, that is only true if I do not declare bankruptcy. In that case, the market maker still has to fulfill my role as my risk is closed by the court.

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Buying 100 calls at $2 costs $20,000 not $200. You bought ONE call

The owner of the call has the right to exercise. You are the owner. You can exercise it or you can sell it to close. Otherwise, you got it right: the call you bought for $2 and sold for $6 made you a $400 profit.

EDIT: Sorry, new to this site so I don't have direct comment privileges yet. It is not true that"all option contracts are "one-sided, in that if I write a call and you buy a call, I did not write your call. I wrote a call for the market maker and the market maker sold you a call."

If I am the best bid and you choose to hit that, we transact with each other. In the absence of a willing counter party, a market maker's function is to aid in the making of a market in an options exchange, by making bids and offers for his account in the absence of public buy or sell orders. That is when the MM is the counter party.

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  • Since 100 shares at $100/share = $10K, where does $20K come from? – RonJohn Jan 27 '18 at 1:52
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    A US equity option is typically a contract to buy/sell 100 shares of the underlying stock. So 100 options is a contract to trade 10,000 shares. But @RonJohn is correct that you don't multiply the number of shares by the premium; you multiply the number of contracts by the premium: 100 * $2 = $200. – dg99 Jan 27 '18 at 2:36
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    Bob is right. “A call” is a contract for 100 shares. One call at a $2 premium is $200, the 100 calls are $20K. – JTP - Apologise to Monica Jan 27 '18 at 2:36
  • @JoeTaxpayer I believe you, but to an options trading novice (like me) but who knows math, "$2 premium" means "add $2 to the $100 share price", thus giving 100 shares at $(100+2)/share -> $10,200. – RonJohn Jan 27 '18 at 2:57
  • Fortunately, if one mis-speaks to a broker or types the online order wrong, there’s a moment of “this will cost $xxx dollars, do you want to place the order?” A contract is for 100 shares. When I enter an order I type “1” into qty field. – JTP - Apologise to Monica Jan 27 '18 at 3:23

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