stock options, im still a litte confused?

Question

im just getting the idea of trading options but im still confused a little. agree to buy a commidity for a specific price by a specific time. sounds easy to understand. ok, so i agree to buy GM at 100USD buy august for the option price of 25.00. august comes along and GM is worth 120 USD. i can buy it on the specific date for 100USD and sell the same day for 120 USD? and how about if its not above 100USD, i dont have to buy it right? all i lose is the price of the option? and how much is that usually or does it differ in the commidity. im almost there just need a better understanding. please help thanks

Answer 1

You have the idea. You can actually exercise the option at any time up to the expiration date. When the expiration date comes, if the option is in the money, your broker will automatically exercise it for you and sell the stock. If it is not in the money, you loose the amount you paid for the option, no more. The amount you would loose on a worthless option depends on how much you paid for it. The value of an option is determined by three main factors when you purchase it. 1. Call price of the stock in relationship to the current price of the stock. 2. time until expiration 3. volitility of the stock.

You can go to Yahoo finance and check out some of the current option prices to see the relationship. For example Yahoo.

http://finance.yahoo.com/q/op?s=YHOO

Answer 2

Your August GM option has an exercise price of 100 and you pay 25 for an option. This is january and you have 8 more months before the option expires. In August you say the option is 120. So on that day your loss is reduced to $5 meaning you have made up $20 of your investment premium of $25.
For your other question of if the price don't go above 100 in August, you are right the option will expire what you call 'out of the money' and you will loose all your premium of $25. Premium is the price of the option.
Commodities don't have options, they have something called Futures which is similar to options except that the products will be commodities and is used to hedge commodity price fluctuations by the farmers where sometimes deliveries of the physical commodities sometimes take place, like porkbellies and cow heards in Livestock.

Answer 3

You seem to be talking of a call option...this is where you purchase a right to buy a certain stock , at a certain time for a certain price. (the RIGHT makes it optional)

So, in your example you pay$25 for the right to buy a certain number of GM shares at $100 Ea. If at that date The GM stock is at $120, You buy the stock for $100 and Keep it or sell it at the going rate. If the stock is at or below $100, you do not have to buy it, you just let the option expire. In any of these scenerios, the $25 you paid for the option is gone to the other side of the trade.

Now the other thing about this call option you buy.....lts say it cost TODAY $25 to buy GM stock at 100 in 3 months... The value of this call option will change depending on the current value of the GM stock. Therefore if GM stock goes down next month, you might have bought the equivalent option then for $15.
If the GM stock had risen in that month, the call option could cost $30... The option can be sold any time before the expiry date

Option prices vary depending on the expiry time written into them

Answer 4

Trading options is not for the faint of heart. Or of a small pocket book.

Basically, your betting wheather you think a particular stock will go up or down. Big rewards if you are right, and big losses if you are wrong. Generally options are for a specified period of time, then they expire.

In your example, you will get the difference between the $120 stock price and the $100 purchase price. If the stock drops below $100 then you start loosing money and will have to pay up when the options are done. That's called a "Margin Call"

In commidities, your buying an actual product. Generally, you never really see the product, you just trade them.

Options and Commidities are very tricky to manage. Most folks should not try to trade in these without some serious study. As I stated before, you can make alot of money OR you can lose your shirt. Do your homework waaaay before you start trading.

Answer 5

If, as you say, "you agree to buy a commodity for a specific price by a specific time", you are not buying an option, but a futures contract. With an option, like you actually indicate in your example with GM, you have the right to buy, but not the obligation. And, also like you say, if the price of the commodity at expiration of your option is below your strike price in the case of call, or above in the case of a put, you do nothing and lose the premium you paid.

Answer 6

You have it right. If your option at expiration is below the strike price you can still exercise it. You would pay $100 a share for a block (100 shares). Your losses would be the price you over paid plus the cost of the option which you paid when you created the option.

The price of an option is stated when you are buying it. In the above option you may of bought it for 2.5 / that is $2.50 per shear times 100 shares for (1) block (option).

Please note if the stock sold for $103.00 you would of made $50.00 profit. If you sold the stock the selling fee may be about $65.00 for a net loss of $15.00