Some use-cases with Options.


1 0

I am new to this forum. And to Options trading.

I have read a lot before posting here. And based on that, have come up with some use cases I can execute.

But I am looking for confirmation of my understanding.

Can you help me with these below?

Thank you.

PS - I use only Buy side for discussion, I understand it applies to Sell also.

1. Is it correct that out-of-the-money Options are always cheaper?
I always see them under $2 - like $1.5 to cents.

Because anyone can buy at the market for lower price.
Can this be taken as a general statement?

2. Is it correct that after the option becomes in-the-money, its price goes up by almost same price as stock?

For a stock is trading at $50, I buy a [email protected]$50 for $1.
If the stock goes up by +$10 to $60 - the Call price will also go up by almost +$10 to $11?

Minus some difference.

3. If 1 & 2 are true, I made a Use Case of how I can use a Call to Leverage my Buy.

Assume a Stock is trading at $50. I buy a Call Option at $55.

Because it is $5 out of the money - I can hope to buy the [email protected] for $1.

If stock does not go up, or only goes up to $55, I just let it expire at its new lower value. And lose a max of $100.

If stock does goes up by +$15 to $65, the option will also go up by +$15, making it $1+$15 = $16.

So I have $10 gain on $1. That's 1,000% Gain?

Is this correct?
In what cases can this go wrong?

4. If I hedge a Dividend stock with a Put option, I can keep all Dividend(-premium) with no to minimal risk?

I am going to make up some numbers to make the point.

Stock trading at $250 pays a dividend of $5 in the coming week.

First, I buy [email protected] at $2
Then, I buy the stock at $250.

Stock pays $5 dividend.

I sell the stock at $250 at $0 loss.

$5 Dividend-$2 Premium=$3 Profit.

Basically, the dividend is only reduced by the premium.

Is this correct in theory?
Where and how can it go wrong?

5. If 4 is correct, it will work with high price stocks only.

Because at a given yield, we need the dividend/ share as much higher than the premium as possible - to keep most dividend.

$1 Dividend - $1 Premium = $0
$5 Dividend - $1 Premium - $4.

Thats keeping 80% of the dividend.

Thank you.
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