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brainsmile · 02-06-2004, 11:51 PM

you're purchasing the right to buy a stock at a future price. So the less probable that price is the cheaper that option.

For instance if a stock is 10 bucks and it's the first of the month and you buy an option to purchase the stock for 30 bucks (keep in mind the option expires in about 3 weeks) then the only way to exercise it is if the price is above 30 bucks on the day the option expires. It's going to be cheap to buy this option because the likelihood of this happening is very low.

Same thing on the sell side... if the stock is 30 and you buy an option to sell at 10... the stock has to be below 10 on the day of expiration. Should be cheap to buy. It's sort of insurance that you'll get a better price.

If the option expires you lose the money you put in. Of course you can sell the option at any time. If for instance the next day, after you buy a call option to buy at 30, the stock has great news and jumps to 28. Well then the likelihood of it passing 30 is much higher and the value of your option to buy has increased dramatically. Then you can sell the put and make a profit without ever exercising the option.

I think this is right.

02-06-2004, 11:51 PM	#4
brainsmile Chief of Naval Operations Join Date: Jun 2000 Location: woah... why is welfareloser here with me so early in the morning and more importantly why am I wearing her clothes?!? Posts: 13,754	you're purchasing the right to buy a stock at a future price. So the less probable that price is the cheaper that option. For instance if a stock is 10 bucks and it's the first of the month and you buy an option to purchase the stock for 30 bucks (keep in mind the option expires in about 3 weeks) then the only way to exercise it is if the price is above 30 bucks on the day the option expires. It's going to be cheap to buy this option because the likelihood of this happening is very low. Same thing on the sell side... if the stock is 30 and you buy an option to sell at 10... the stock has to be below 10 on the day of expiration. Should be cheap to buy. It's sort of insurance that you'll get a better price. If the option expires you lose the money you put in. Of course you can sell the option at any time. If for instance the next day, after you buy a call option to buy at 30, the stock has great news and jumps to 28. Well then the likelihood of it passing 30 is much higher and the value of your option to buy has increased dramatically. Then you can sell the put and make a profit without ever exercising the option. I think this is right. __________________ ********************************** DCM #1 (Founder) "Nobody beats Vitus Gerulaitis 18 times in a row." - Vitus Gerulaitis on beating Jimmy Connors after 17 failed attempts.