Hi,
I am new to this forum. And to Options trading.
I have read a lot before posting here. And based on that, have come up with some use cases I can execute.
But I am looking for confirmation of my understanding.
Can you help me with these below?
Thank you.
PS - I use only Buy side for discussion, I understand it applies to Sell also.
1. Is it correct that out-of-the-money Options are always cheaper?
I always see them under $2 - like $1.5 to cents.
Because anyone can buy at the market for lower price.
Can this be taken as a general statement?
2. Is it correct that after the option becomes in-the-money, its price goes up by almost same price as stock?
For a stock is trading at $50, I buy a Call@$50 for $1.
If the stock goes up by +$10 to $60 - the Call price will also go up by almost +$10 to $11?
Minus some difference.
3. If 1 & 2 are true, I made a Use Case of how I can use a Call to Leverage my Buy.
Assume a Stock is trading at $50. I buy a Call Option at $55.
Because it is $5 out of the money - I can hope to buy the Call@55 for $1.
If stock does not go up, or only goes up to $55, I just let it expire at its new lower value. And lose a max of $100.
If stock does goes up by +$15 to $65, the option will also go up by +$15, making it $1+$15 = $16.
So I have $10 gain on $1. That's 1,000% Gain?
Is this correct?
In what cases can this go wrong?
4. If I hedge a Dividend stock with a Put option, I can keep all Dividend(-premium) with no to minimal risk?
I am going to make up some numbers to make the point.
Stock trading at $250 pays a dividend of $5 in the coming week.
First, I buy Put@250 at $2
Then, I buy the stock at $250.
Stock pays $5 dividend.
I sell the stock at $250 at $0 loss.
$5 Dividend-$2 Premium=$3 Profit.
Basically, the dividend is only reduced by the premium.
Is this correct in theory?
Where and how can it go wrong?
5. If 4 is correct, it will work with high price stocks only.
Because at a given yield, we need the dividend/ share as much higher than the premium as possible - to keep most dividend.
$1 Dividend - $1 Premium = $0
But
$5 Dividend - $1 Premium - $4.
Thats keeping 80% of the dividend.
Thank you.
I am new to this forum. And to Options trading.
I have read a lot before posting here. And based on that, have come up with some use cases I can execute.
But I am looking for confirmation of my understanding.
Can you help me with these below?
Thank you.
PS - I use only Buy side for discussion, I understand it applies to Sell also.
1. Is it correct that out-of-the-money Options are always cheaper?
I always see them under $2 - like $1.5 to cents.
Because anyone can buy at the market for lower price.
Can this be taken as a general statement?
2. Is it correct that after the option becomes in-the-money, its price goes up by almost same price as stock?
For a stock is trading at $50, I buy a Call@$50 for $1.
If the stock goes up by +$10 to $60 - the Call price will also go up by almost +$10 to $11?
Minus some difference.
3. If 1 & 2 are true, I made a Use Case of how I can use a Call to Leverage my Buy.
Assume a Stock is trading at $50. I buy a Call Option at $55.
Because it is $5 out of the money - I can hope to buy the Call@55 for $1.
If stock does not go up, or only goes up to $55, I just let it expire at its new lower value. And lose a max of $100.
If stock does goes up by +$15 to $65, the option will also go up by +$15, making it $1+$15 = $16.
So I have $10 gain on $1. That's 1,000% Gain?
Is this correct?
In what cases can this go wrong?
4. If I hedge a Dividend stock with a Put option, I can keep all Dividend(-premium) with no to minimal risk?
I am going to make up some numbers to make the point.
Stock trading at $250 pays a dividend of $5 in the coming week.
First, I buy Put@250 at $2
Then, I buy the stock at $250.
Stock pays $5 dividend.
I sell the stock at $250 at $0 loss.
$5 Dividend-$2 Premium=$3 Profit.
Basically, the dividend is only reduced by the premium.
Is this correct in theory?
Where and how can it go wrong?
5. If 4 is correct, it will work with high price stocks only.
Because at a given yield, we need the dividend/ share as much higher than the premium as possible - to keep most dividend.
$1 Dividend - $1 Premium = $0
But
$5 Dividend - $1 Premium - $4.
Thats keeping 80% of the dividend.
Thank you.
