I was wondering.........

[trade2make£]

hello all,

I feel i have gathered alot of information over the last few months from this site and others, however, there are a few things which seem very simple but im not sure of the answer....so:

is it still worth buying an option if you wanted it on the same day or is it better to just buy the stock??

When a merger or aquistion takes place say for e.g. the one cuurently with CBC buying CNET.....what in theory should happen to the two stocks, will they both go same direction, will one go up and the other decline????? i have them on my watch list on the investopedia portfolio and analysing for myself but wanted some other opinions.

When looking at an option chain, why does it have really low prices from the stock price? surely if the underlying is at 70 but on the option chain there is a strike price of say 50, surely one would just buy and excersize right away?!?

This one may seem very basic to some but just to clarify: can one only sell on the markets if someone else wants to buy?


Thanks,

 

[Jaydee]

Hi Trade2

Hope these answers help:

1) Whether you buy the call option or underlying stock depends on the strategy you are following. Options bought have a premium which has to be paid which an investor needs to take into consideration (amongst other things such as time to expiry, strike price, underlying price, etc).

2) When an aquisition occurs, the target firm price goes up and the aquirer share price drops. The targets share price goes up because the buyer will have to a pay a premium over the current market price. The aquirers share price goes down because it has to pay more than the target company is worth, the merger/aquisition process is expensive, intergration issues and expenses, etc.

3) If an option is in the money (ITM), as in your example, you can bet the premium you have to pay will be a lot more than you would get from buying the option and excersing it immediately.

The premium (PM) is calculated buy adding the intrinsic value (IV) of the option to the time value (TV) of it.

PM = TV + IV

The IV is, basically, the difference between the underlying asset and the strike price of the option. If an option is out of the money (OTM) its IV is 0. In your example, the IV is 20.

The TM is based on how long the option has until expiry. The longer the time period, the more the writers of the option will charge as a premium as there is more uncertainty for them. Think about it this way, it would be easier for you to figure if an option was more likely to be in or out of the money tomorrow than in 10 years time. With uncertainly comes cost and this is passed on to the buyer of the option.

4) You can only sell if someone is willing to buy from you and vica versa. Effectively, you have to have a counterparty to do business with.

Best

JD