Buying a Call Option

Peter February 26th, 2012 at 4:26pm

Hi RJay,

1) Don't worry about the volume - if the price is right, there will always be a buyer. If you must get out of the position, at worst you can enter an order to sell at below intrinsic value where you will for sure find buyers.

2) The market price of the call is dependent on two main values: intrinsic value and extrinsic value. I.e. the price of the stock now and the expected volatility of the stock until the expiration date.

RJay February 25th, 2012 at 10:16am

Great site!

Question: I bought 2 calls @ $2.80. The call is for a 31$ strike price in July (its at $32 right now), I see there are only 13 contracts under volume (2 of them are mine).
1) With such low volume, is it guaranteed I'll be able to sell my calls?
2) With such low volume, whats driving the price of the call? I am speculating the stock will rise at least to $35-$37 by July.

Peter February 22nd, 2012 at 5:48pm

Hi Curtis,

First answer:
If you sell the option (i.e. close the option position) then your profit will be the difference between the price (premium) you sold the option minus the price you paid for the option. Let's say that when the stock was trading at $530 like you describe that the option is trading at $55. If you sell back the option then your profit will be $55 - $37.65.

You are confusing "exercising" the option and closing out the position prior to expiration.

If you were to exercise the option (i.e. convert the option to stock), then yes your profit will be $530 (market price of stock now) - $515 (price that you took delivery of the stock for) - $37.65 (premium initially paid for the option).

Second answer:
Same as above - if you sell the option back instead of exercising it for stock you make/lose only on the transaction of the option - not the stock.

I would say that if you are very bullish on a stock then you are better placed to buy deep out-of-the-money call options as the % gains are greater if the stock does reach the levels anticipated.

Let me know if anything is unclear.

Curtis February 22nd, 2012 at 11:54am

Hi Pete, First thanks for offering some great advice on here. I have recently become interested in buying call options but I am still a little unsure about several things.

First example: ABC trading at $510. I can buy a $515 strike price call option for $37.65/share for july 21, 2012. Say by july 1st stock is trading at $530. Now when I sell my option before the expiration date I will make money on the $515 and $530 difference ($15 per share). But I assume the strike price will be less due to time decay, so I would lose money on this. Correct me if I m wrong.

Second example: ABC trading at $510. I can buy a $500 call option for $47.05/share for july 21, 2012. Say by july 1st stock is trading at $530. Now when I sell my option before the expiration date I will make money on the $500 and $530 difference ($30 per share). Plus any increase in the call option price.

It seems to me that if you are very bullish that a stock will climb you would be better to buy a stock where the strike price is below the current trading price. Any thought would be appreciated. Thanks

Peter February 5th, 2012 at 11:45pm

I think it depends on your broker and if you can buy the stock on margin. But you can surely sell to close prior to exit the position and still profit from the increase in the options' price.

Peter February 5th, 2012 at 11:43pm

Yep, you'll have to sell to close on the 17th during trading hours as the 18th is a Saturday ;-)

Mike February 5th, 2012 at 11:43pm

Peter ,

If I don't have sufficient funds for buying the stock on expiration date(say,to buy 100 GOOG) for call option , does the only option I have is to sell to close or i can exercise the call and gain profit without actually buying it on the expiration date

Mike February 5th, 2012 at 11:39pm

Hi Peter,

I have a call option which expires on 18th Feb.Can i sell to close this option on 18th (since i am hoping the stock to go up on 18th itself) or i have to sell(to close) before 17th end of day.

Peter February 5th, 2012 at 4:36pm

Hi Mark,

You don't have to sell option back before the expiration date, however, if the call option is in-the-money (stock > strike) at the expiration date and you don't do anything you will automatically be assigned the stock by your broker during the clearing process. So, the next day you will have a long position in the stock in your statement.

Mark February 4th, 2012 at 12:36am

Hi Peter. Fantastic site! I commend your great advice.
Question: buying 50 contracts @ .08 for a Feb 18 expiration long call on a stock trading @ 8.25. The strike price is 9.00. I am very bullish on this stock, but brand new to option trading. Do I have to sell the option, (or exercise) before the expiration date even if the stock is trading above the strike price on the exp day??
Hope this isn't too dumb of a question

Thank You!

Mark

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