If your write an option, it is a bet that the price of the stock will go up or down from a buying?

Question

point to a strike price before an expiration date? And can you cash this bet in for its value when it is "in the money", whereas the option has accrued value as it approaches its strike price (kinda like you are winning a horse race bet gradually as probabilities move your way)? And when it does hit the strike price, does that give you a right to (buy or sell) a number of shares at the price it was when you bought the option (call or put) respectively in the first place?

Answer 1

If you write an option means you are selling options to a buyer. This means you are like short position in stocks and you are betting that the price of the stocks won't reach the strike price at expiration date. It is the buyer who is like a bull or in long position who bets that the stock price will move beyond the strike price on expiration.
That is the writer bets that the option will expire out of the money and the buyer will believe that the option will expire in the money.

Answer 2

If you write an option, it means you a selling an option that you do not already own, leaving you with a short position.

You appear to be asking about buying an option instead of writing an option. Only the buyer (holder) of an option has the right to buy or sell a number of shares. That right exists exists even if the option is out of the money. The price at which you can buy or sell the shares is the strike price of the option. The price of the shares at the time you bought the option does not matter.

While some people buy an out of the money option hoping that the stock price will go past the strike price, that is not only reason people buy options. I am far more likely to buy an option for other reasons, such as one leg of a spread. Here is an example of a spread I opened last week:

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I opened the following spread:

Long 5 Jan 08 $80 puts at $18.60 = $9,300
Short 5 Apr. $62.50 puts at $2.45 = $1,225

Total cost = maximum risk = $8,075

If assigned on the short puts, and I exercise the long puts, I will have a profit, before costs, of

(($80.00 - $62.50) x 5) - $8,075 = $675.

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For information on the reason I chose to open that spread see

http://messages.yahoo.com/Business_%26_Finance/Investments/threadview?m=tm&bn=4686677%23optiontradestraderecommendations&tid=3274&mid=3274&tof=1&off=1

Answer 3

If your writing options you are bringing in the premium cost the the buyer is willing to pay you. When you write options you are obligated to sell stock to the buyer at the strike price. Your objective as a writer is for the option to never be in the money and eventually you want the option to expire worthless. In regards to your point on whether or not the actual price can hit your strike, it depends on how far the strike is away from the actual. Some option buyers will by options so far out of the money like Google it is almost handing the option writer free $$. I write options also, but I write covered options, so if I do get an option called, I have the stock to sell in my portfolio. Hope that helps. Best wishes!

Answer 4

IYou can buy or sell a put and buy or sell a call. If you buy a call you are getting the option to buy a stock at a certain price at a time in the future (you think it's going up), and you buy a put you buy the option to sell at a certain price (you think its going down). As an example - you buy a call KO 50 @ 6. This means you have the option to buy Coke at 50 at some time in the future. If KO goes to $60 you exersize the call and buy a $60 stock for 50. If you had bought a put KO 50 @ 6 you have the option to sell Coke for 50 at a time in the future (you would exersize at 30 - for example). The @6 part is where the sellers of calls and puts come in. Any time you sell a call or put you recieve a certain amount of money (you are selling the option - so you recieve compensation - $600 in our example). You are hoping that the option is never exersized, so you just keep the money that the buyer paid you.