Stock Option Question?!? REALLY NEED YOUR HELP!?

Question

Ok let say i want to buy a stock option, and the stock currently at 43.50... I want to buy a call option on this stock and i think it will go up, so would it be smarter to buy it at the strike price 40.00 or 42.50....the break even price for the 40 is 43.80 and the break even price for the 42.5 is 44.30.

Now im only buying this stock for the short term, considering stock options expire this friday im only going to hang on to it for this week, im just confused with the fact of the "break even price" Because i want to buy it at the 42.5 stike because its a lot cheaper than the 40.0...wouldn't i make more if i buy it at 42.5? even though the break even pricce is higher?

Or what is the stock goes up to 44.00 even, would i still make money on the 42.5 strike, because the stock went up but it didnt reach its break even price

Answer 1

The "break even price" for a call option is the point where the intrinsic value of the option at expiration is equal to the price you paid for the option. So, for the $40 call to have a break even of $43.80 it would cost $3.80, and for the $42.50 call to have a break even for $44.30 it would cost $1.80.

If you held the options until expiration, and the stock was at $44.00, you would make $0.20 per share with the $40.00 call and you would lose $0.30 per share with the $42.50 option.

The $42.50 call will never make more dollars per contract than the $40.00 call. However, if the stock price goes up enough, the $42.50 call will make a higher percentage. For example, if the stock goes up to $50 per share at expiration:

the $40 call would make ($50 - $43.80) = $6.20 = 163%
the $42.50 call would make ($50 - 44.30) = $5.70 = 317%.

Given your questions, I strongly urge you to learn more about options before actually trading them. Losses of 100% are common among people buying options without understanding enough about them. Losses exceeding 100% are common among people selling options without understanding enough about them.

Answer 2

Don't confuse yourself. All that matters is the price of the stock at expiration minus your breakeven price-that is the profit.

Breakeven price = premium(price) of the call + strike

Commissions are left out for simplicity, but if you wanted you could just add the commissions to the end of the formula as well.

The reason why the 42.50 is cheaper is because you would be paying 2.50 more for the stock at expiration than if you purchase the call to only buy at 40. Remember, an American style call gives you the right, but not the obligation to buy the stock at the specified price, or strike on or before the expiration. If the stock goes to 44, and you have the 42.50, assuming what you have written to be correct, you have paid 1.80 per share for your call(a standard "call" contract is 100 shares), and now have the right to buy the stock at 42.50 - for a total of 44.30. Your loss would be .30 per share - .30 X 100 = $30 per contract.

Be SURE if you are buying options to purchase them during market hours if you are using a market order. The stated prices afterhours are often not the prices that you will pay by the time the market opens. You can use limits but it is still advised to purchase during market hours.

Happy trading! Write me if you have any questions.

Answer 3

Most people who buy stock options never exercise them -- they sell them before they expire or let them expire worthless. Buying an option that expires in a week is crazy if you expect to exercise it.

If you are planning on actually taking possession of the stock -- then you are better off buying the stock at 43.50 -- which is lower than the breakeven price of 43.80 or 44.30.