Moving from out of the money towards in the money

[safvan]

I was wondering how an option price works when you buy out of the money calls and the stock starts moving in your desired direction.

Suppose Goog trading at $490 with September 640 calls selling at $0.35. Now say about 2 weeks from now Goog is trading at $525, what would be this out of the money option be worth?

Could you sell it for a profit if it is still out of the money but the trade is atleast moving in your direction.

Thank you..

 

[Hotch]

Well it depends. To put it simply, your option will have increased in price, because the underlying has got closer to the strike price, but also decreased in price, because there is less time left for it to close above the strike price.

 

[QuestOptions]

it is possible for your option to be worth more than what you purchased it for even if the strike price doesn't go in the money. (I am not saying that is the case with this example because I don't have all the information)

If you are trading single options (calls and puts) you can use an option analyzer to get a really good picture of what needs to happen to your position (profits and losses). The options analyzer will tell you what will happen to the value of the option if the stock rises as well as how time decay and volatility effect the option.

I have seen posts in this forum in which people have discussed free options analyzers. Look around or maybe someone can point you to one.

Remember options don't move on direction alone, volatility and time also play a factor.

 

[safvan]

I am talking about expensive options like google and apple and other high priced but liquid stocks. It is worth looking into..I am studying price behaviour for front or weekly options in this case.

 

[QuestOptions]

The best way to find your answer is to stress test your position with an options analyzer.

See what happens when prices increases/decrease. (move up a little, move up a lot, move down a little, move down a lot, stay neutral)
See what happens when volatility increases/decreases. (volatility rises a lot , volatility rises a little, volatility falls a little, volatility falls a lot)
See what happens through the passage of time. (an option is a time decaying instrument, when the move happens and how much time you have left is very important)

Play out these scenarios in a number of different ways.

There is no generic answer to your question. Once you identify what needs to happen in order for you to win or lose then you can answer whether the trade makes sense to you.

There are some that would only sell that option and there are others that would only buy that option. That is what makes markets, different opinions.

 

[hen12y]

I was wondering how an option price works when you buy out of the money calls and the stock starts moving in your desired direction.

Suppose Goog trading at $490 with September 640 calls selling at $0.35. Now say about 2 weeks from now Goog is trading at $525, what would be this out of the money option be worth?

Could you sell it for a profit if it is still out of the money but the trade is atleast moving in your direction.

Thank you..

a 640c on an underlying asset of 490 with only a month or two to expiry will have a minimal delta. If the stock moves up $10 then your call value may become worth $0.45 or so, but the bid/offer spread will probably knock out most of this profit. The way this will make money is if the stock price massively rallys, Call skew increases and IV increases, But even the skew and IV will have a limited impact as it is so OTM that the vega will be pretty tiny also.

Your strategy is of limited risk ($0.35 outlay), but it is not one of less risk as there is a substantial chance of you loosing this $0.35

there are probably better strategies for you than going long an unhedged call in my mind at least.

...now here's hoping the share price doesn't triple over the next month! :cheesy:

 

[daveyc]

buying calls like your example is like buying a lottery ticket. even if the goog moves up like your example, you are so close to expiration and as the stock rises the volatility comes out and so the options are worth less money.

 

[charliechan]

I was wondering how an option price works when you buy out of the money calls and the stock starts moving in your desired direction.

Suppose Goog trading at $490 with September 640 calls selling at $0.35. Now say about 2 weeks from now Goog is trading at $525, what would be this out of the money option be worth?

Could you sell it for a profit if it is still out of the money but the trade is atleast moving in your direction.

Thank you..

no.

your call still has no intrinsic value. your other component - time value or extrinsic value has decreased as you are approaching expiry and youre still otm.

youre only chance is if vol explodes. thats just as hard to see coming as future price direction. if it does, you may either be 1. itm, or 2. further otm.

look on the bright side - your risk is limited though!