Ho boy these are slightly confusing haha

[kngavl]

Alright, the stock in question is CM (CIBC). Today it was trading at 60$+.
Now I'm looking at the options and 1 of them goes like this (it's a call):
Bid Ask Last Price Volume Volatility
+ 08 SE 58.000 3.950 4.250 3.850 508 41.68

So If I were to buy this, would it be proper to say the stock price would have to go up to 62.25$ (58+4.25{the ask}) before I could break even? And afterwards how would I calculate the amount of profit if say the stock went to, say, 64$? (With only 1 option!

Another thing, when you buy an option, and I'm guessing this may be different from broker to broker, how do you then purchase the shares at the strike?

Thanks again mates,

 

[kngavl]

Alright then... hah. Okay lets try a different question, an assumption again.
Say I buy 1 Sept64call, ask of .75. Okay great, now IF the stock reaches 64.75 +(.025, which is the spread) so 65$, do I break even or does the price of the stock not exactly correspond with the price of the option? So if the stock price goes up 1$, does the option follow through up 1$? If not, how is it calculated?

 

[Rhody Trader]

The value of an option is directly related to the value of the underlying stock. Go back to basic options definitions. When you are long a 64 call you own the right to buy that stock at 64. Your profit if you execute the option is thus the difference between where you can sell it after you purchase it at 64. So if the market is pricing the stock at 65 then you would make 1 point, less the cost of the option and any commissions or fees.

 

[kngavl]

The reason I ask, is that it's obvious that it will go up with the stock as the stock goes up, but from what I've read in a couple places and from what I can see it's not exactly related other then direction.
Yesterday the Sept64call had an ask of .75, CM was trading at 60.10.
Today the Sept64call has an ask of 1.25, however CM is trading at 62.64 a 2.54$ increase in stock price. So while CM is up 2.54, the option is up .50$.
What is the relation between the 2, other then taht if one goes up, so does the other?
I'm asking because I would rather like to close an option rather then exercise it.

 

[Rhody Trader]

The price of an option is based on a combination of time to expiration, the price of the underlying stock, and the anticipated volatility of the price of the underlying stock. The volatility aspect of it all is important. That can change very quickly without the stock price moving much at all. That's why sometimes the option can rise in value when the stock doesn't, or fall in value when the stock rises.

 

[kngavl]

Okay great thanks. Yeah I noticed that a small change in volatility related to a large change to the options price and now I also think I have a basic understand of some of the greeks. Using the model to calculate the theoretical price of the option I found that the delta was .43. Now from what I've read that means that for every 1 dollar the stock goes up, the option price goes up .43$. Or for every 10 cents that the stock goes up, the option gains apprx. .043$ and since it trades in 100's, that means each 10 cent increase in stock price is the equivalent of a 4.3$ increase in profit from the option.
Now considering that the buy/sell comissions (in my case comes to a total of 19$, for now), I would need the stock to increase in value by around .44 to break even.

There is no question in the above, I'm just wondering if I'm missing something. Because I can buy a call with a premium of 1.45$ and once it goes up by .44 (in the above example) I break even, +/- .1 due to the spread.
It's late and I gotta think this over again but if anyone is willing to clarify, please shot.

 

[TWI]

If you are trading the options naked then you were right to look at it as you did in your early post. Once you go long the 64 call at 0.75 you will not pay more than that so once underlying is over 64.75 the option is in the money and so will you be.
The value of the option will change all the time however based on the underlying price, time to expiry and perceived or "implied" volatility. This is how you work out if paying 0.75 is good value or not. But once you have done the transaction that is what you have. Implied volatility is how most people look at options as this is a market perceived level of future volatility and will not be the same as historic volatility which is calculated from the recent historical price action. It allows you to compare options at a lot of different strikes because it strips out the component of underlying price. A lot of people trade purely the volatility rather than the underlying and so will hedge out the underlying or "delta" exposure at the same time as the option is done. This leads to more degrees of risk as delta changes with price and vol does too so you have a thing called "gamma" risk that is the change in the delta as the price of the underlying (and vol) changes so you have to buy and sell underlying as the price moves to keep yourself net flat.

 

[BSD]

Very interesting that.

I am basically totally clueless about options apart from knowing what puts / calls are, lol, one thing I don't understand either is why does one trade options, why not just stick to futures, do options offer any advantages you don't get with futures ?

 

[BSD]

The only advantage that springs to mind off-hand is that with options your worst case scenario when a market crashes for example is clearly defined, whereas with futures it's not.

Hmm.

 

[TWI]

BSD, Options can a fantastic way to generate cash when the underlying is doing nothing. Often they allow you to stay in a trade that otherwise you would be stopped out of on the underlying. They allow you to refine your risk parameters on an open position and can be useful when you report to investors to smooth your monthly returns. I would not want to be without an options book.

 

[BSD]

BSD, Options can a fantastic way to generate cash when the underlying is doing nothing. Often they allow you to stay in a trade that otherwise you would be stopped out of on the underlying. They allow you to refine your risk parameters on an open position and can be useful when you report to investors to smooth your monthly returns. I would not want to be without an options book.

Totally new world to me.

Maybe I'll have to go have a closer look at them then.

Have a good weekend

 

[TWI]

I think the only way you will ever truely understand the use of options in your trading is to actually build a spreadsheet to manage them and start trading them. There will probably be a few losses initially but just consider that an entry fee to a more refined approach to risk than outright trading. It will not be a regretable descision to explore this area I assure you. You will also then discover a lot of people who claim to know about options trading yet within one or two sentences you will realise they are clueless andf just full of b/s.

 

[kngavl]

Alright so their are 2 ways to make money from options.
Either you can wait for the option to go up in price and sell at profit.
Or you can wait for the stock to go up in price till you get past your Break even point and then exercise your option and sell the under lying stock or keep it for a future sell at a profit.
And vice versa with puts.
Correct?

 

[TWI]

Yes, but remember you can write as well as buy options. So with a call or a put you can be long as well as short.