call options clarification and correct me if i'm mistaken?

Question

Heres the scenario for a call option, and please answer the questions in brackets or correct me
lets say i buy 5 contracts (100shares/contract...is it always 100 shares/contract? ) of CALL OPTIONS of EBAY @ $20/share (is this price set by the market? and how much would it cost me to buy these 5 contracts?) and choose my expiration to be on Dec 1st, 07 (and do i choose my expiration date?), then the stock of ebay goes up to $30 in Septemeber so i decide to sell my calls in Sept(is that called excersing it?) would i have made 15,000 - 10,000 = $5000, i dont think thats the case...isnt the point of buying calls to buy 'em for a lot cheaper than $20/share and make a handsome profit? if its $20/share as the price on the stock market, how would calls be different than just buying and selling stocks? ok i guess this sums it better shouldnt the price/share when buying calls be a lot cheaper than the price in the stock market?

i thank u in advance for all the answer

so according to Dethruhate

my profit would be 3 million? $10x400,000 minus 2.5x1,000,000

so in order to calculate how much u made u take the amount by how much it went up which is the $10 and multiply by number of shares in the call? NOT BY THE PRICE OF THE SHARE ON THE MARKET WHICH IS ASSUMED TO BE $60? so $60x400,000 - 1000,000 would be wrong

Answer 1

I will answer the first part of your question because for the second you need specific information.
OK if the price of stock is 20 then your option price will be differnt. It is calculated using complex formulas or someone asks a price which you decide to contract. Now say the ask is 2 and you buy 5 contracts that makes it 2x100x5=1000. Now you say the price moves to 25 on expiration day. You assume the strike to be 22 that is the price you contract to buy the stock in future. Now the price has moved to 25. You make a profit of 3 per option which totals to 3x100x5=1500. Effectively you make 500 which is 1500 - 1000 you paid for the option that is buying calls.

Answer 2

Hi,

A call option buyer has the right by not the obligation to buy an underlying stock at a specified strike price within a certain time frame.

The buyer makes a profit from the call option if the stock price rises. If the buyer decides to exercise the option, the writer of the option has to deliver the underlying security. Buying a Call option is similar to having a long position on a stock.

To Answer your questions:

(is it always 100 shares/contract?)
No, in the USA market it's 100 contracts, but in the Aussie market it's 1000 contracts.

(is this price set by the market? and how much would it cost me to buy these 5 contracts?)
Yes the option price is set by the market, the price of the 5 contracts will depend if you bought an In, Out or At the money call option.

(and do i choose my expiration date?)
You can choose the month that the option will expire but not the exact date. (Usually it's the third Friday of every month)

(is that called excersing it?)
No that's not exercising. To exercise a call option means E.G
if you bought 5 call option contracts with a one mth expiry at a $20 strike price for $1 per option contract (total spent on call options $500). And the stock price went up to $30, you decide to exercise your options, that means you buy the stock which is currently trading for $30 at $20 per share.
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Phew...Hope this answers some of your questions, I'll answer the rest another day, that was alot of typing heh

Answer 3

A call is the option to buy. In this example you made $5,000, less the price of your option.

Typically options are no more than 90 days in the future, and they rise (or fall) in price very quickly, being a derivative of the actual stock. There is something called the "Triple Witching Hour" which is when lots of options expire.

If you buy a call option and the stock tanks, you are out money. You don't lose as much money as actually buying the stock and watching it fall in value. However, you have bought the option, and you are out whatever the cost of that option was. Also, options expire. A stock may regain lost ground, an expired option is permanently worthless.

In your example, you wouldn't sell your calls - you would exercise the option to buy at $20.00.

Answer 4

Buying calls is better than buying the shares becuase it protects you from the share going down. You only can gain (aside from the cost of the call). Also, it is much cheaper.

If you had a million dollars a knew that microsoft was going to go up 10 dollars. Instead of buying the 20,000 shares at say $50, say you could buy 400,000 call options at $2.50. If it does go up $10, you only make $200,000 with the shares, but could make $4,000,000 on the calls.

BTW, you can estimate the cost of the call using black-scholes option pricing model.

Answer 5

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