Will i profit if my stock option exceeds its strike price?

Question

I have 6 weeks left till my stock option expires. It is an ishares canadian index option. It flirted with the strike price this afternoon and the last 4 days I know time value is important but with only 6 weeks to go if my option exceeds the strike price (depending on how far) will i still profit because of the increase?

Answer 1

It all depends on what you paid for your options. If you paid $6 while it was out of the money and time decay has knocked it down to $4, but you're still out of the money, then you may or may not make a profit.

Most brokers allow you to see the "greeks" of an option. Basically, you can get a rough estimate of what your option will be worth at a higher price by adding the delta impact to your current price (assuming time, volatility, etc remain constant).

So for example, if the stock is at $38 and the strike price is $40, your option price is 2.40 and the delta is 0.6, then your option price if the stock to move to $41, would be approx 1.80 ($3 x 0.6 delta) more than the current price, or $4.20. It'll actually be a little different because of gamma, but for a rough guestimate, this should do.

The things to keep in mind (esp if you trade options) is the interrelationship between the factors affecting your option prices such as:

Delta moves with price
Gamma affects delta
Theta is your time decay
Vega your volatility impact
as lesser so Rho.

Here's a link for a free tutorial to get you started. The site is great for education.

http://www.888options.com/advanced/volatility_greeks.jsp

Hope that helps!

Answer 2

Well, the real question is. Really.

What are you doing trading options? If you don't know, what makes an option profitable.