Options Trading Tutorial

Advice on an Options Trade?

I was looking at buying 100 contracts on the Jun 21 Call of TTWO at a 2.90 Premium and strike of 17.50 (+TUOFW) on Ameritrade. There aren’t too many tutorials for this scenario. A)Would this be a “Buy to open” transaction? B)So that would be an initial purchase of $29,000 (plus commissions and contract fees), that money is gone, correct? It’s not like a stock where I maintain value, when you buy a contract the initial price is money spent? When the stock goes up to $25 (Apr 29 release of GTA IV, this is almost a guaranteed price) and I decide to exercise this for cash. C)Would this be a “Sell to close” transaction? D)Do I need to have the $175,000 in my account to buy the stock so I can sell it or is there a way I can just cash out my profit? Take the $7.50 per share ($25 share price - $17.50 strike price) and have it deposited in my account ($7.50 x 10,000 = $75,000) Please give me any more info or advice on this one deal. I do not want get into options trading after this.

Public Comments

1. <<<A)Would this be a “Buy to open” transaction?>>> Yes. <<<B)So that would be an initial purchase of $29,000 (plus commissions and contract fees),>>> Correct. <<<that money is gone, correct? It’s not like a stock where I maintain value, when you buy a contract the initial price is money spent?>>> In terms of the value of your account, it is like a stock in that the value of your account will reflect the contracts at the current bid price ($2.65, or $26,500 for 100 contracts). In terms of margin available, that money is gone. <<<When the stock goes up to $25 (Apr 29 release of GTA IV, this is almost a guaranteed price) and I decide to exercise this for cash. C)Would this be a “Sell to close” transaction?>>> When you exercise a stock call option you buy the stock at the strike price. A "sell to close" does not involve exercising the option or buying the stock. It is simply selling an option you own, very much like you would sell a stock that you own. Either choice closes your option position. It is sort of like buying a cake. You can eat it, or you can sell it, but you cannot do both. Either way you no longer own the cake. <<<D)Do I need to have the $175,000 in my account to buy the stock so I can sell it or is there a way I can just cash out my profit? Take the $7.50 per share ($25 share price - $17.50 strike price) and have it deposited in my account ($7.50 x 10,000 = $75,000)>>> If you exercise the options you will be spending $175,000 to buy stock. One way or another that amount of money needs to be available. If you simply sell the options you will not buy the stock and you will not need any cash available. If the stock is at $25.00 you probably can get at least $7.50 per share for the options. It is almost always better to simply sell the options than it is to exercise them and sell the shares. <<<Please give me any more info or advice on this one deal. I do not want get into options trading after this.>>> I believe you are far too confident about the stock going up to $25. Clearly the majority of the traders do not expect that to happen or the stock would be trading at a higher level today. I assume the "Apr 29 release of GTA IV" is public knowledge, so that event is already factored into the stock price. I am not saying the stock price cannot go up that much. I am simply saying that I think the odds against it happening are greater than you believe. Finally, I would question the advisability of investing that much money in something you do not fully understand.