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58

Out-of-the-money options close to expiration often have no bids. If no one is willing to pay even $0.01 for them, you will have to let them expire worthless. Your loss essentially already happened when the underlying failed to surpass your strike; you would at best be fighting to salvage pennies now.


13

You appear to be thinking of option writers as if they were individuals with small, nondiversified, holdings and a particular view on what the underlying is going to do. This is not the best way to think about them. Option writers are typically large institutions with large portfolios and that provide services in all sorts of different areas. At the same ...


13

Is the price you are quoting the bid, ask, or last? If this was the last, then the information could be days old. The bid or ask may be up to date pricing but the other side may have no interest at that price. This kind of thing often occurs when prices are drastically out of or in the money; or very close to expiration.


12

You are likely making an assumption that the "Short call" part of the article you refer to isn't making: that you own the underlying stock in the first place. Rather, selling short a call has two primary cases with considerably different risk profiles. When you short-sell (or "write") a call option on a stock, your position can either be: covered, which ...


12

I put in the details of your scenario. I adjusted the volatility to get the price near what you showed. Next, I dropped the time to 2 weeks. Look what happened - The stock, still out of the money, but the call jumped to $1.39. If the stock doesn't keep rising, the price of the calls drops each day and expires worthless. But there's a chance to sell at a ...


12

As an analogy, consider people betting on an (American) football game between Team A and Team B. Let's make buying the option analogous to betting on Team A. Then selling it is analogous to betting against Team A. The sale price of the option is analogous to the odds a bookie will offer. The expiration date is analogous to the end of the game. Being OTM is ...


11

You can always sell your calls at the market price (the bid). If the trade did not execute then you are asking for a price greater than the market price. If the bid is zero then it is highly unlikely that anyone is going to take them off your hands even for mere pennies and you can chalk this one up as a total loss. The opportunity to minimize your ...


10

Options have legitimate uses as a way of hedging a bet, but in the hands of anyone but an expert they're gambling, not investing. They are EXTREMELY volatile compared to normal stocks, and are one of the best ways to lose your shirt in the stock market yet invented. How options actually work is that you're negotiating a promise that, at some future date or ...


10

Here is a quick and dirty explanation of options. In a nutshell, you pay a certain amount to buy a contract that gives you the right, but not the obligation, to buy or sell a stock at a predetermined price at some date in the future. They come in a few flavors: Call Option - You can buy a stock at a predetermined price (higher than the current price) ...


10

If the buyer exercises your option, you will have to give him the stock. If you already own the stock, the worst that can happen is you have to give him your stock, thus losing the money you spend to buy it. So the most you can lose is what you already spent to buy the stock (minus the price the buyer paid for your option). If you don't own the stock, you ...


10

The time value decay is theoretically constant. In reality, it is driven by supply and demand, just like everything else in the market. For instance, if a big earnings announcement is coming out after the close for the day, you may see little or no time decay in the price of the options during the day before. Also, while in theory options have a set ...


10

I do this often with shares that I own - mostly as a learning/experience-building exercise, since I don't own enough individual stocks to make me rich (and don't risk enough to make me broke). Suppose I own 1,000 shares of X. I don't expect my shares to go down, but I want to be compensated in case they do go down. Sure, I could put in a stop-loss order, ...


9

If you buy a call, that's because you expect that the stock will go up. If it does not go up, then forget about buying more calls as your initial idea seems to be wrong. And I don't think that buying a put to make up for the loss will work either, the only thing that is sure is that you will pay another premium (on a stock that could stay where it is). Even ...


9

Many web sites state that "90% of options expire worthless." That is categorically FALSE. The majority of options do not expire worthless. As per stats provided by the CBOE: 1) About 10% of options are exercised (gain or loss) 2) About 60% are closed before expiration 3) About 30% expire worthless 90% of options go unexercised which is very different ...


8

If you're talking about just Theta, the amount of decay due to the passage of time (all else being equal), then theoretically, the time value is a continuous function, so it would decay throughout the day (although by the day of expiry the time value is very, very small). Which makes sense, since even with 15 minutes to go, there's still a 50/50 shot of an ...


7

SELL -10 VERTICAL $IYR 100 AUG 09 32/34 CALL @.80 LMT 1) we are talking about options, these are a derivative product whose price is based on 6 variables. 2) options allow you to create risk out of thin air, and those risks come with shapes, and the only limit is your imagination (and how much your margin/borrowing costs are). Whereas a simple asset like ...


6

I'm adding to @Dilip's basic answer, to cover the additional points in your question. I'll assume you are referring to publicly traded stock options, such as those found on the CBOE, and not an option contract entered into privately between two specific counterparties (e.g. as in an employer stock option plan). Since you are not obligated to exercise a ...


6

You bought the right – but not the obligation – to buy a certain number of shares at $15 from whomsoever sold you the option, and you paid a premium for it. You can choose whether you want to buy the shares at $15 during the period agreed upon. If you call for the shares, the other guy has to sell the shares to you for $15 each, even if the ...


6

Understanding the BS equation is not needed. What is needed is an understanding of the bell curve. You seem to understand volatility. 68% of the time an event will fall inside one standard deviation. 16% of the time it will be higher, 16%, lower. Now, if my $100 stock has a STD of $10, there's a 16% chance it will trade above $110. But if the STD is $5, ...


6

Here are some things to consider if you want to employ a covered call strategy for consistent returns. The discussion also applies to written puts, as they're functionally equivalent. Write covered calls only on fairly valued stock. If the stock is distinctly undervalued, just buy it. By writing the call, you cap the gains that it will achieve as the stock ...


6

I agree that high volatility just means the underlying stock price fluctuates more, and it does not imply if the stock is going up or down. But a high volatility in the price of an underlying also means that there is a higher chance that the underlying price could reach extreme prices (albeit in either direction). However, if you purchased a call option ...


6

You can, but it is easier just to throw your money away. The process you describe can never result in profit, as the option is priced according to the underlying security and the risk. Of course, something relevant can happen 3 milliseconds after you successfully buy the option, and there is a profit (or loss) possible. But even then, selling the option ...


5

I would make a change to the answer from olchauvin: If you buy a call, that's because you expect that the value of call options will go up. So if you still think that options prices will go up, then a sell-off in the stock may be a good point to buy more calls for cheaper. It would be your call at that point (no pun intended). Here is some theory which ...


5

You can buy some S&P futures or go one step further and buy the underlying stocks that compose the index (which is what future/cash arbitrageurs do). But unless you are interested in a very specific arbitrage, buying SPY and selling calls on SPY would by and large achieve the same outcome.


5

Owners of American-style options may exercise at any time before the option expires, while owners of European-style options may exercise only at expiration. Read more: American Vs. European Options


5

Because an equity option can be constructed at essentially any price by two willing counterparties on an exchange, there are not enough ISINs to represent the entire (i.e. infinite) option chain for even a single stock on a single expiration date. As a result, ISINs are not generated for each individual possible options contract. Instead the ISIN is used ...


5

I have an example of a trade I made some time ago. Stock price - $7.10 $7.50 call option 16 months out $2. By entering the position as a covered call, I was out of pocket $5.10, and if the stock traded flat, i.e. closed at the same $7.10 16 months hence, I was up 39% or nearly 30%/yr. As compared to the stock holder, if the stock fell 28%, I'd still ...


5

If those are the respective real time quotes then yes, you could do a Discount Arbitrage (buy call, exercise call to acquire stock, and sell stock. To avoid slippage, you'd buy a Synthetic Put via a Combo Order (buy the call and short the stock) and then exercise the call to close the position. The reality of these 'free lunch' situations is that: you're ...


5

It's no wonder that you're confused. The first paragraph that you quoted is a disaster. In clearer words: If a call appreciates in price and you sell it, you walk away with cash in hand and a profit That profit can be from intrinsic or extrinsic premium (the call's price must simply appreciate) There is no such thing as writing a buy contract. Writing is ...


4

Check the rules with your broker. Usually if it expires in the money, the broker would exercise it. But you need to check with your broker about their rules on the matter.


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