Profiting in the best case scenario

[Jigsus]

For now I'm reading and trying to understand everything I can about stock options. There's something bugging me about the way I can get the profit out of them.

In the case of stock options you buy a put or a call. Whatever the type that was bought let's say the best case scenario happens and it turns out the options are very profitable. :clap: How do you get your profit out of them?

Buying the stocks then selling them on the market seems cumbersome for such a streamlined derivatives market (it's not trading derivatives anymore if I end up actually buying the stock)

Selling (called "writing" as I understand it) options seems like it holds unlimited risk and is generally a bad idea. If I'm selling the option that I previously bought the responsibility of exercising the option will be transfered to me right?

So how do you get the profit out of it with minimum risk?

 

[Scouser76]

For now I'm reading and trying to understand everything I can about stock options. There's something bugging me about the way I can get the profit out of them.

In the case of stock options you buy a put or a call. Whatever the type that was bought let's say the best case scenario happens and it turns out the options are very profitable. :clap: How do you get your profit out of them?

Buying the stocks then selling them on the market seems cumbersome for such a streamlined derivatives market (it's not trading derivatives anymore if I end up actually buying the stock)

Selling (called "writing" as I understand it) options seems like it holds unlimited risk and is generally a bad idea. If I'm selling the option that I previously bought the responsibility of exercising the option will be transfered to me right?

So how do you get the profit out of it with minimum risk?

If it's liquid enough, just SELL (as opposed to 'write' another one) the option you bought. You'll get the intrinsic value + time premium back.

 

[Jigsus]

If I sell it who's responsibility is to provide the stocks if the new owner wants to exercise?

 

[Scouser76]

If I sell it who's responsibility is to provide the stocks if the new owner wants to exercise?

Your original counterparty, who was obliged to provide the stock to you.

I think you're getting selling and 'writing' (also often confusingly called selling, so don't worry) confused.

If you own the call (say) option, you have the right to buy the stock from the counterparty to the option (the person who 'wrote'/sold it to you).

Now, if you sell ME that option, I get the right to buy the stock FROM THE SAME COUNTERPARTY, and for that, I will pay you the premium of the option.

Essentially, you are now out of the contract, which is then between me and your original counterparty + you have the cash (profit) I gave you for obtaining the right to buy from the counterparty. You basically sold me the piece of paper granting the bearer the right to buy the stock at the strike price.

Make sense?

 

[Jigsus]

Yes it does. You're right I was confusing selling and writing.

Thanks for the clarification.

 

[Scouser76]

No probs