Long call/put risk

SkyHi

Junior member
14 0
Hello community. How are you :)

I'm new here and am taking some online courses to learn about options.

I am a bit baffled by one thing at the moment:

How much loss can I get on a Long Call/Put position?

For example: I have a Long Call position of XYZ stock May 80 trading at 4.5 usd (450)


Would this mean that if the underlying stock is going down in price and the XYZ stock falls back to 75.5 (80 - 4.5) I would be out of the position? Aka, I would burn down my Premium which is kind of like default stop loss?

Or, the stock can keep falling further (lets say from 80 to 60) and my premium wouldn't be effected? Just that I would lose it when the option expires or I would lose a whole lot more if I decided to exercise the option for some reason on a such a massive loss.

That being said - If as in this example, my position goes out of the money by a long shot (from 80 to 60) there is always a chance it can go back up to being in the money!! Right?

so If I take 2 month option and the first month is a total failure I can still hope for profit and my loss can only be the premium?

I come from Forex background. And the Stop loss concept is a whole lot simpler there

Thank you
 
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SkyHi

Junior member
14 0
I did search for this. But how am I to define this exact scenario in a searchable term
Couldn't.. Nothing specific came up.

Also, I've read over 80 slides on options and this question still bothers me.

Edit: Thanks for the link! But, it still doesn't clarify what I asked. It says that I can only lose my premium, but later it says that "You can always sell your option prior to expiration to avoid exercising it, to avoid further loss" Emphasis being on the "Further Loss" part.


Sorry, I'm still learning.

But Hey. There are no dumb questions, right? Only dumb answers!

p.s.

I disagree! Search engines like askJews.com are already gaining steam
 
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SkyHi

Junior member
14 0
Thanks

But that still totally disregards what I was asking!

Am I being super dumb here? Is my question so inadequate?
 

Martinghoul

Senior member
2,690 276
Thanks

But that still totally disregards what I was asking!

Am I being super dumb here? Is my question so inadequate?
Sorry, I thought that was your original question... I could be mistaken.

What's the actual question again?
 

SkyHi

Junior member
14 0
Np

I explained my question in original post, but maybe I made it unclear.

In Forex you have a stop loss. Lets say I set my stop loss to -450 dolars. Once the SL is hit, the position closes.

Does the same happen in options?

As in my previous example;

If I have Long Call position of XYZ stock May 80 trading at 4.5 usd (450 usd)

Does this mean that if the stock goes down by 450 usd ((4.5usd a share) aka 80 - 4.5 in stock value)) does that mean that my Stop loss has been hit and the position will close?

Or the stock can keep plummeting, lets say, to 10 dolars a share and I will still be able to keep my position in hopes that it will recover till my contract expires. And as long as I do not exercise the option while it is out of the money I will not obtain this loss. And in case the option expires at the stock being down to 10, I will still lose only the premium I have paid.
 

SkyHi

Junior member
14 0
I think I stumbled upon the answer:

Limited Risk

Risk for the long call options strategy is limited to the price paid for the call option no matter how low the stock price is trading on expiration date.


Example nr 2:

Suppose the stock of XYZ company is trading at $40. A call option contract with a strike price of $40 expiring in a month's time is being priced at $2. You believe that XYZ stock will rise sharply in the coming weeks and so you paid $200 to purchase a single $40 XYZ call option covering 100 shares.

Say you were proven right and the price of XYZ stock rallies to $50 on option expiration date. With underlying stock price at $50, if you were to exercise your call option, you invoke your right to buy 100 shares of XYZ stock at $40 each and can sell them immediately in the open market for $50 a share. This gives you a profit of $10 per share. As each call option contract covers 100 shares, the total amount you will receive from the exercise is $1000. Since you had paid $200 to purchase the call option, your net profit for the entire trade is therefore $800.

However, if you were wrong in your assessement and the stock price had instead dived to $30, your call option will expire worthless and your total loss will be the $200 that you paid to purchase the option.

This seems to good to be true....

In Forex, when the trade goes against me and I see some signs that it might reverse in my favor I remove the stop loss, there fore exposing myself to huge risk.

In options, however, if I have a Long call with 2 months expiration I can let the stock plunge to the lowest depths the first month, and still hope for the underlying stock to recover the second month. And sleep well each night knowing that no matter how low the stock will plummet I will only lose the premium..

This seems to good to be true. Where is the catch?
 

paszkman

Established member
649 54
I think I stumbled upon the answer:

Limited Risk

Risk for the long call options strategy is limited to the price paid for the call option no matter how low the stock price is trading on expiration date.


Example nr 2:

Suppose the stock of XYZ company is trading at $40. A call option contract with a strike price of $40 expiring in a month's time is being priced at $2. You believe that XYZ stock will rise sharply in the coming weeks and so you paid $200 to purchase a single $40 XYZ call option covering 100 shares.

Say you were proven right and the price of XYZ stock rallies to $50 on option expiration date. With underlying stock price at $50, if you were to exercise your call option, you invoke your right to buy 100 shares of XYZ stock at $40 each and can sell them immediately in the open market for $50 a share. This gives you a profit of $10 per share. As each call option contract covers 100 shares, the total amount you will receive from the exercise is $1000. Since you had paid $200 to purchase the call option, your net profit for the entire trade is therefore $800.

However, if you were wrong in your assessement and the stock price had instead dived to $30, your call option will expire worthless and your total loss will be the $200 that you paid to purchase the option.

This seems to good to be true....

In Forex, when the trade goes against me and I see some signs that it might reverse in my favor I remove the stop loss, there fore exposing myself to huge risk.

In options, however, if I have a Long call with 2 months expiration I can let the stock plunge to the lowest depths the first month, and still hope for the underlying stock to recover the second month. And sleep well each night knowing that no matter how low the stock will plummet I will only lose the premium..

This seems to good to be true. Where is the catch?

The catch is that the price of your stock has to go up, not just from your strike price, but your strike price PLUS the premium, and it has to do this BEFORE they expire.

So you are just not hoping to be right, but hoping to be right at the right time.
 

SkyHi

Junior member
14 0
The catch is that the price of your stock has to go up, not just from your strike price, but your strike price PLUS the premium, and it has to do this BEFORE they expire.

So you are just not hoping to be right, but hoping to be right at the right time.


Thank you

I see


But I assume if the option is for 2 months there are plenty of room for the stock to move having many ups and downs giving the chance to exercise it.

And clearing strike price + premium is a whole lot more than clearing spread in Forex/stock market?
 

paszkman

Established member
649 54
Thank you

I see


But I assume if the option is for 2 months there are plenty of room for the stock to move having many ups and downs giving the chance to exercise it.

And clearing strike price + premium is a whole lot more than clearing spread in Forex/stock market?

yes, a lot can happen in 2 months..think about who is on the other side of the trade..do they want you to win?
 

SkyHi

Junior member
14 0
yes, a lot can happen in 2 months..think about who is on the other side of the trade..do they want you to win?


A call writer
But it's not like he can influence anything. He can only hope for the market to go against me or for me to not take profits when I should.

In my, yet, uneducated opinion!
 

Martinghoul

Senior member
2,690 276
Np

I explained my question in original post, but maybe I made it unclear.

In Forex you have a stop loss. Lets say I set my stop loss to -450 dolars. Once the SL is hit, the position closes.

Does the same happen in options?

As in my previous example;

If I have Long Call position of XYZ stock May 80 trading at 4.5 usd (450 usd)

Does this mean that if the stock goes down by 450 usd ((4.5usd a share) aka 80 - 4.5 in stock value)) does that mean that my Stop loss has been hit and the position will close?

Or the stock can keep plummeting, lets say, to 10 dolars a share and I will still be able to keep my position in hopes that it will recover till my contract expires. And as long as I do not exercise the option while it is out of the money I will not obtain this loss. And in case the option expires at the stock being down to 10, I will still lose only the premium I have paid.
It's the latter, i.e. there's no stop loss. Furthermore, it's almost never worthwhile to exercise early.
 

SkyHi

Junior member
14 0
It's the latter, i.e. there's no stop loss. Furthermore, it's almost never worthwhile to exercise early.

Alright

Could you please tell me why it wouldn't be worthwhile? I would be very interested to hear!!

Having Long call 2 month option, being in the money I notice in the last week's Monday I notice that the underlying stock is making a strong reversal. Wouldn't it be more profitable to exercise the option early in this case assuming that the reversal would happen.

Please expand
 
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Martinghoul

Senior member
2,690 276
Alright

Could you please tell me why it wouldn't be worthwhile? I would be very interested to hear!!

Having Long call 2 month option, being in the money I notice in the last week's Monday I notice that the underlying stock is making a strong reversal. Wouldn't it be more profitable to exercise the option early in this case assuming that the reversal would happen.

Please expand
In an overwhelming number of cases, there's more value to the option before expiry than the value of the resulting position if you were to exercise it. This means that it's almost always not economic to exercise early.
 
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